Documentof The World Bank ReportNo: 27213-UNI FOR OFFICIALUSEONLY PROJECTAPPRAISALDOCUMENT ON A PROPOSEDCREDIT INTHEAMOUNTOF SDR 22.3 MILLION (US$32 MILLIONEQUIVALENT) TO THE REPUBLICOF NIGERIA FOR MICRO, SMALL AND MEDIUM ENTERPRISEPROJECT November 18,2003 This document has a restricteddistribution and may be used by recipientsonly in the performance of their official duties. Its contentsmay not otherwisebe disclosedwithout World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective November 16,2003) CurrencyUnit = Naira Naira 137.35 = US$1 US$0.0073 = Naira 1 FISCAL YEAR January 1 -- December 31 ABBREVIATIONS AND ACRONYMS ACCION ACCION (Americans for Community Co-operation inOther Nations) International ADR Alternative Dispute Resolution BDS Business Development Services BDSF Business Development Services Fund B M O Business MembershipOrganization CAC Corporate Affairs Commission CAS Country Assistance Strategy CBN Central Bank of Nigeria CFAA Country Financial Accountability Assessment CGAP Consultative Group to Assist the Poorest CPAR Country Procurement Assessment Report CRMS Credit Risk Management System DFID Department for InternationalDevelopment, UK EA Executing Agency ELAN Equipment Leasing Association of Nigeria ERR Economic Rate of Return FATE FATE Foundation FGN Federal Government of Nigeria FD/NIPC Finance DepartmentNigerian Investment Promotion Commission FIAS Foreign Investment Advisory Service FIRS Federal Inland Revenue Service FPM Financial Procedures Manual FPSI Network Financial, Private Sector and InfrastructureNetwork GDP Gross Domestic Product GTZ Deutsche Gesellschaft Fur Technische Zusammenarbeit (GTZ)GmbH IAU/NIPC Internal Audit Unit/Nigerian Investment Promotion Commission ICA Investment Climate Assessment ICR ImplementationCompletion Report IDA International Development Association IFC International Finance Corporation JISU Joint Interim Strategy Update LIL Learning and Innovation Loan FOROFFICIAL USEONLY Mand E Monitoring and Evaluation M o F Ministryo fFinance M S M E Micro, Small and Medium Enterprises NBCI Nigeria Bank for Commerce and Industry NEEDS National Economic Empowerment and Development Strategy NERFUND Nigerian Economic ReconstructionFund NGO Non-Governmental Organization NIDB Nigeria Industrial Development Bank NIPC Nigerian Investment Promotion Commission N P V Net Present Value OPCPR Procurement Service Policy Group P I M Project Implementation Manual PMU Project Management Unit PPF Project Preparation Facility PRIU Procurement Reform Implementation Unit PRSP Poverty Reduction Strategy Paper PSD Private Sector Development RC Review Committee RPED Regional Program for Enterprise Development S A Special Account SME Small and Medium Enterprise SMEDAN Small and Medium Enterprise Development Agency o f Nigeria SMIEIS Small and Medium IndustriesEquity Investment Scheme SPN Specific Procurement Notice STEP Support and Training Entrepreneurship Program TA Technical Assistance TOR Terms o f Reference TTL Task Team Leader UNCITRAL UnitedNations Commission on InternationalTrade law U N I D O UnitedNations Industrial Development Organization U N D P United Nations Development Program U S A I D United States Agency for International Development VAT Value-Added Tax woccu World Council o f Credit Unions Vice President: Callisto E. Madavo Country Manager/Director: MarkD.Tomlinson IFC Regional Director Haydee Celaya Sector Manager: Demba Ba IFCADA MSME Africa Program Manager Maxwell Aitken Task Team Leader Peter Mousley This document has a restricted distribution and may be used by recipients only in the performance of their official duties. I t s contents may not be otherwise disclosed without World Bank authorization. NIGERIA MICRO,SMALL AND MEDIUMENTERPRISE PROJECT CONTENTS A. Project Development Objective Page 1, Project development objective 2 2. Key performance indicators 2 B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supportedby the project 2 2. Mainsector issues and Government strategy 3 3. Sector issues to be addressedby the project and strategic choices 5 C. Project Description Summary 1. Project components 9 2. Key policy and institutional reforms supported by the project 14 3. Benefits and target population 15 4. Institutionaland implementation arrangements 15 D.Project Rationale 1. Project alternatives considered and reasons for rejection 18 2. Major related projects financed by the Bank andor other development agencies 20 3. Lessons learned and reflected inthe project design 20 4. Indications of borrower commitment and ownership 22 5. Value added of Bank support inthis project 22 E. Summary Project Analysis 1. Economic 23 2. Financial 23 3. Technical 23 4. Institutional 24 5. Environmental 25 6. Social 26 7. Safeguard Policies 26 F. Sustainability and Risks 1. Sustainability 27 2. Critical risks 27 3. Possible controversial aspects 30 G. Main Conditions 1. Effectiveness Condition 30 2. Other 30 H. Readiness for Implementation 30 I.CompliancewithBankPolicies 31 Annexes Annex 1: Project Design Summary 32 Annex 2: Detailed Project Description 37 Annex 3: Estimated Project Costs 52 Annex 4: Cost Benefit Analysis Summary, or Cost-Effectiveness Analysis Summary 53 Annex 5: Financial Summary for Revenue-Earning Project Entities, or Financial Summary 58 Annex 6: (A) Procurement Arrangements 59 (B) Financial Management and Disbursement Arrangements 68 Annex 7: Project Processing Schedule 76 Annex 8: Documents inthe Project File 77 Annex 9: Statement o f Loans and Credits 78 Annex 10: Country at a Glance 80 Annex 11:Draft Selection Criteria for Business Development Service Providers 82 Annex 12: Draft Outline o f the Performance Framework 85 Annex 13: Project Management Unit - Terms o f Reference 88 Annex 14: Rules and Responsibilities o f the Review Committee and Executing Agent 94 Annex 15: Disclosures on Potential IFC Investmentsand IFC Partners Benefiting from the Project 96 Annex 16: Performance Targets 100 Annex 17: Letter o f Sector Policy 102 MAP(S) IBRD32765 NIGERIA Micro, Small andMediumEnterpriseProject ProjectAppraisal Document Africa RegionalOffice AFTPS late: November 18, 2003 Team Leader: Peter Mousley Sector Manager/Director: DembaBa Sector(s): Generalfinance sector (58%), Other industry Zountry ManagerDirector: Mark D. Tomlinson (42%) 'roject ID: PO83082 Theme(s): Small andmediumenterprise support (P), Other Lending Instrument: Specific Investment Loan (SIL) financial andPrivate sector development(s) Project Financing Data [ ]Loan [XI Credit [ ] Grant [ ] Guarantee [ 3 Other: For LoanslCreditslOthers: Amount (US$m):US$32.00 million Proposed Terms (IDA): StandardCredit Commitmentfee: 0.00-0.50percent Service charge: 0.75% Foreign Total 0.90 I 1.90 20.10 32.00 NTERNATIONALFINANCE CORPORATION 24.60 Borrower: GOVERNMENT OF NIGERIA Responsible agency: NIGERIAN INVESTMENT PROMOTION COMMISSION Address: Plot 1181, Aguiyi Ironsi Street, P.M.B.381, Garki, MaitamaDistrict, Abuja, Nigeria Contact Person: Lawal G. Lantewa, Director,PolicyAdvocacy andExtemalRelations Tel: (234)09-413-2224 Fax: (234)09-413-4803 Email: Lantewa@Yahoo.Com Estimated Disbursements ( Bank FY/US$m): FY 2005 2006 2007 2008 2009 Annual 4.10 6.50 8.10 9.90 3.40 hmulative 4.10 10.60 18.70 28.60 32.00 Project implementation period: 2004 - 2009 Expected effectiveness date: 0611512004 Expected closing date: 0613012009 :IPADFOnliaUlrch1Mo A. Project Development Objective 1. Project development objective: (see Annex 1) The Micro, Small and MediumEnterprise (MSME) Project inNigeria aims to increase the performance and employment levels o f MSMEs in selected non-oil industry sub-sectors and in three targeted states o f the country. To achieve this, the project inNigeria will: (i) develop and strengthen the capacity o f local intermediaries to deliver financial and non-financial services to MSMEs; (ii)reduce selected investment climate barriers that constrain M S M E performance; (iii) mobilize, via (i) (ii), and increased private investments inMSMEs and intermediaries. 2. Key performance indicators: (see Annex 1) Considering the pilot nature o f this operation which will involve the introduction o f new types o f private-public participation inthe delivery o f services to MSMEs, a performance monitoring and evaluation framework i s being designed to assess results at four levels: (1) output; (2) intermediary (BDS and financial institution) outcome; (3) firm outcome; and (4) impact. The results will be assessed across the four principal components o f the project. Assessments will focus on determining the extent to which the grant and technical assistance provided by the Government through this project to intermediaries resulted in significant additional private sector investment and sustained improvements inprovider and firm performance - including employment creation. Quantitative methods and qualitative assessments will be generated through case studies o f individual firms and surveys in order to ascertain that, as a result o f the types o f interventions to be undertaken by the project, sustainable increases in firm productivity and employment can be achieved. The modalities o f implementation, including detailed methodologies and Terms o f Reference (TORS),will be finalized as part o f the implementation manual. A preliminary set o f performance targets for the project are set out inAnnex 16. As this project i s to be driven very much by market demand, these targets will be revised throughout the project as practical knowledge o f new markets and how they respond to the services generated through this project increases. This will enable the project to adapt and extend its targets. B. Strategic Context 1.Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1) Document number: : Joint Interim Strategy Update (JISU) (Report No. 23633-UNI) presentedFebruary 13,2002. Date of latest CAS discussion: CAS scheduledfor Board discussion inMay, 2004. With a GDP o f about $40 billion, Nigeria is Africa's second largest economy. However, 70 percent o f its population lives below the poverty line with an average per capita income o f $200. Its economy i s a dichotomy between the oil and non-oil producing sectors, with the middle-income oil-producing economy o f perhaps five million people having a per capita income of about US$2,200. The rest o f the population i s part o f a poor non-oil producing economy. Nigeria ranks low inthe human development category -- 151st out o f 174 countries for which Based on the United Nations Development Program's (UNDP) Human Development Index, UNDP has data, and 22ndout o f 45 African countries. The fundamental cause o f poverty in Nigeria i s the economic stagnation that the country has experienced for almost two decades. International Development Association (IDA) notes inits Interim Strategy Update for the Federal Republic o f Nigeria (February 2002) that while best estimates suggest that the economy has grown by an average o f 2.9 percent per year since 1993, substantial poverty reduction would require annual growth o f around five percent in agriculture and eight to ten percent inthe non-agricultural economy (excluding government and the oil and gas sectors). Inits strategy paper, IDA defineda poverty reduction strategy focusedon accelerating economic growth. Its development framework comprised three supporting pillars: (1) improve economic governance; (2) create the conditions for rapid private sector led poverty-reducing growth, particularly inthe non-oil economy; and (3) enable local communities to take charge o f their own development. Assistance to achieve the development objectives under the first and thirdpillars are to be provided through a combination o f lending and non-lending services including those for economic management capacity building; sectoral programs on education, health, energy, water and transport; and community driven projects. This M S M E Project, which is an integralpart o f the World Bank Group' support to the Government o fNigeria, will focus on the second pillar o f this strategy and will complement the IDA Privatization Support Project currently being implemented, the Competitiveness Forum Working Group, and the Lagos Strategy initiatives. The Project was developed following a request by the Federal Government o f Nigeria (FGN) to participate in ajoint International Development Association (IDA)/International Finance Corporation (IFC) Micro, Small and MediumEnterprise Development Pilot Program for Africa (26114-AFR,henceforth Pilot Program). This Pilot Program i s designed to accelerate private sector growth inAfrica by leveraging World Bank Group instruments - particularly those o f IFC and IDA - and international best practices. 2. Main sector issues and Government strategy: The Economic and Sector Work that underpins this project reveals a non-oil private sector that faces major development challenges (see Annex 8). Findingsfrom these initiatives reveal that the Nigerian private sector suffers from highcosts and lack o f competitiveness. The productivity o f Nigerian manufacturing firms relative to other countries inAfrica and Asia i s low and has been deteriorating over time. Capacity utilization in the manufacturing sector i s only 52 percent on average. Between 1980 and 1994, Nigeria's private sector investments averaged 7 percent o f GDP per annum (based on the World Bank's estimates), well below the average 20 percent invested by the world's fastest growing economies. Major constraints to private business in Nigeria were identified and include macroeconomic uncertainty, particularly inflation and interest rate trends and exchange rate volatility; a weak financial system; poor infrastructure (roads, railways, ports, airports, telecommunications); a restrictive business climate (onerous customs procedures, lack o f availability o f export credit, multiple licensing and regulation requirements); security concerns; low quality education and skills training; distorted trade and tariff policies; and competition from public enterprises (there are 1,500 public enterprises employing two-thirds o f the non-governmental formal sector labor force and receiving, over the years, about US$90billion ininvestmentresources, over 50 percent o ftotal investment inthe private sector). - 3 - The Government's development strategy, articulated in a document entitled "Nigeria Economic Policy and Strategy: The Way Forward", was prepared in September 2000 and includes the following central elements: (i) strengthening the fledgling democracy, improving security, and safeguarding political and social stability (including promoting transparency, anti-corruption measures and the rule of law); (ii) pursuingstructural reforms that redefine andreduce the role o f government within the economy and promote the private sector; (iii) rehabilitating and improving physical infrastructure to facilitate economic activity and access by the poor; and (iv) investing in education, health and other social services to lay a solid foundation for longer-term growth but also to buildthe capacity to fight immediate threats to the country's well being such as malaria and the HIV/AIDS epidemic. The following priorities were highlighted inthe strategy paper: (i) improving economic governance; (ii) increasing private sector-led growth; (iii)providing critical services to Nigerians, both poor and non-poor; and (iv) improving education and changing values. Since the advent o f the second Obasanjo Presidency, the economic team has been leading an exercise to prepare a "National Economic Empowerment and Development Strategy" (NEEDS) that will represent also the country's PRSP. MSMEs are identified as a core element o f the NEEDS. The Government has undertaken a number o f initiatives intended to support the private sector and MSMEs. Following the modification o f the institutional framework for the Nigerian Investment Promotion Commission, the Commission was reorganizedand more pro-private sector leaders were appointed inmanagement and inthe Board o f Directors. In2003, the Government passed legislation to establish the Small and Medium Enterprise Development Agency o f Nigeria (SMEDAN). The Small and Medium IndustriesEquity Investment Scheme (SMIEIS), which requires banks to set aside 10 percent o f their profits before tax to invest in small and medium scale industries, was introduced in2001. In2002, the Bank o f Industrywas created as a result o f the merger o f the Nigeria IndustrialDevelopment Bank (NIDB), Nigeria Bank for Commerce and Industry(NBCI), and the Nigerian Economic Reconstruction Fund(NERFUND). Government programs continue to support the privatization o f public enterprises, regulatory reforms and provisions for vocational training schools, technology incubation centers, and other training activities intended to raise the productivity o f Nigerian workers. The impact o f these initiatives to date has been limited. This reflects, in some instances, the relatively recent start-up o f these initiatives. In other cases, the Government of Nigeria has indicated the need to strengthen private sector performance through greater exposure to world-wide best practices and through appropriate replication within Nigeria. This i s particularly at issue indelineating the roles o f the private and public sectors. While in a number o f cases the current generation o f initiatives remain rooted ina public sector approach to M S M E development, the FGNhas expressed interest in pursuingthe more private sector-led, market development approach that characterizes the strategic shift proposed in this M S M E Project. - 4 - 3. Sector issues to be addressed by the project and strategic choices: Givenpolicy, market and institutionalconstraints inNigeria, a key strategic choice is to isolate and tackle some o f the more amenable problems, where there i s a higher probability o f achieving results over the short term. Ineach instance, there needs to be: (i) market or institutional gaps; (ii)models and practices that have been successfully tested elsewhere that can be introduced into Nigeria as a means to close these gaps; (iii) clear potential impact at the level o f the MSMEs. This includes constraints to M S M E access to the financial products and business "know-how" that firms require for growth and productivity. It also encompasses investment climate obstacles and institutional weaknesses within selected agencies o f the public sector. (0 Thespecific MSME issues in Nigeria are asfollows: Poor access tofinance: 85 percent o f all Nigerian manufacturing firms have access only to short-term credit, mostly from costly overdrafts. Restricted access i s less due to a shortage o f liquidity inthe banking system than a combination o f systemic issues such as: (i) government over-borrowing; (ii) MSMEs are perceived as highcredit risks; (iii) insufficient capacity in commercial banks to develop financial products and services responsive to the needs o f MSMEs and to evaluate and monitor effectively a small loans' portfolio. Elsewhere inthe world, these sorts of obstacles have been addressed through a mix of: (1) macro-economic reforms; (2) new technologies and approaches to mitigate credit risk; and (3) know-how transfer to MSMEs. While the proposed project will not be addressing macro-economic issues, it will be seeking to broaden and deepen financial intermediation to MSMEs through the introduction o f new financial institutions, products and tools. This will be done via technical partners that have a proven track record in addressing these obstacles. Interventions will address the shortage o f short, medium and long term finance available to MSMEs by supporting sustainable institutions and profitable lending windows within private financial institutions. Inaddition, the project will finance technical assistance to establish credit bureaus and support leasing companies where there i s interest from private investors and evidence that such time bound and targeted support i s critical to ensure their commercial sustainability. This support would also require that key changes to the tax, legal, and regulatory environment are implementedto ensure the development effectiveness o f any capacity buildingsupport to these institutions. Lack of access to businessdevelopment services: MSMEs' productivity inNigeria i s constrained by lack o f access to critical know-how, including: (1) appropriate technology, market information, and linkages; (2) product development and marketing; (3) human resource management; (4) quality management and efficient production systems; and (5) accounting and financial management. For a number o f reasons, these BDS are not available inthe quantity, price and quality range required by MSMEs. Local Business Development Services (BDS) providers - which can include specialized consulting firms and individuals, formal education institutions, business membership organizations, Non-Governmental Orginazitions (NGOs), and firms within the value chain such as input suppliers - have limited capacity or lack the necessary skills to offer products that are appropriately tailored for MSMEs. This i s particularly true for sector-specific technical training. Most providers tend to use off-the-shelf products that are usually created for larger, more formal businesses. On the demand side, MSMEs make little use o f business development services, partly because they feel unable to afford such services and partly because - 5 - they lack information about these services and the benefits they can derive from their use. The project will foster a supply response -through support to BDS providers -to provide high-priority know-how to MSMEs intargeted industryvalue-chains as well as to stimulate the provision o f new BDS products in markets where excess demand i s identified. Constraints in the investment climate: While the most significant obstacles facing MSMEs in Nigeria are poor infrastructure services and macro-economic policies, there are a range o f other legal, regulatory, and institutional constraints inthe investment climate. These constraints hinder firmperformance by encouraging firms to remain inthe informal sector andby discouraging financial and non-financial service providers from respondingto the MSMEmarket. Under this project, with a mix of technical assistance and institutional capacity building,the Federal Government o f Nigeria will aim to tackle a number o f these constraints: (i) disincentives in business and tax registrationprocedures; (ii) weaknesses inthe commercial dispute resolution process; and (iii)selected laws and regulations affecting the financial sector (particularly leasing, collateral and credit bureaus). These constraints to the investment climate are amenable to measurable improvements over the short-to-medium term. Limitations topublic-private sector dialogue: The public sector has an important role in providing support to MSME development where there are clear market failure issues to be addressed. This role i s not always well-defined, nor i s it a straightforward task to correctly calibrate the public intervention. Too often good intentions can lead public sector institutions to undertake activities that crowd out market solutions. Inefficient and unsustainable results are a common outcome. This inturn leads to cynicism and resignationinpublic-private dialogue with both sectors working uneasily and ineffectively together. The Nigerian Government's strategy i s to open up public institutions to international lessons learned in MSME development. By linking this to performance-based capacity buildingsupport, government agencies can be effectively supported in implementing change programs designed to bring operations in line with global best practice. This project will work with selected institutions inNigeria at the Federal and State levels, supporting them to realize the demonstration effects that will leverage smarter and more effective partnerships with the private sector. Whether addressing financial or non-financial constraints, this project i s essentially one o f dealing with market failure. These failures come invarious forms. There are the information asymmetries that increase risk and reduce supply o f financial services and uptake o f BDS. Demand for BDS i s also reduced as a result o f the externality problems that can accompany training and capacity buildingprograms. The upshot is that firms are constrained intheir capacity to present bankable projects to financial institutions, obtain finance and to handle the external funding obtained. The project will aim to correct for these market failures through the provision o f time-bound and transparent grants to financial services and BDS providers and other technical assistance to address related investment climate and institutional constraints . The challenge i s to deploy this support inways that maximize outreach, sustainability, and impact - that foster rather than undermine commercial market development. - 6 - (io Strategic Choices: Piloting Best Practices and Learning Principles and First Movers - Inline with the umbrellaPilot Program, this project is buildingon bestpractice andlessons learned inAfrica and globally. This entails three major operating tenets interms o f the use o f grant subsidies: (1) a strong private sector orientation- minimizing project management and intermediation through the public sector; (2) the project targets intermediaries providing services to MSMEsrather than the MSME itself, ie., it i s the intermediary, not the MSME,that i s the primary direct beneficiary of project funds; and (3) project funding allocations for the provision o f services to MSMEs - be it to private or public institutions, or to NGOs - are to be governed by core criteria: the assistance provided to these beneficiaries will be: (i) on compliance with based strict technical eligibility criteria that reflect best practice; (ii) delivered via performance grant agreements that focus on sustainability and outreach. By going upstreamwith a variety of suppliers (selected on the basis ofrigorously monitored performance targets focused on achieving commercial viability) and requiring "cost sharing" from intermediaries receiving grant support, there i s an increased expectation that the services supported by the project will be sustained over the longer run, once the project funding has concluded. The draft o f the core eligibility and performance criteria against which beneficiary applications for funding would be assessed are provided in Annex 11. This includes specifications o f the level o f cost-sharing required. Inthe case of the providers, this i s being targeted at 50 percent in line with current practices with "Matching Grant" programs in Africa. Additionally, a choice has been made to target three to four industries in specific regions (targeted states include Lagos, Abia and Kaduna where there are highconcentrations o f MSMEs,which are the project's end beneficiaries) and to implement a comprehensive monitoring and evaluation program inthese areas. Industries will be selected based on the following criteria: highgrowth potential size o f the industry (contribution to GDP) and geographical distribution. number o f MSMEs in the value chain and MSME employment technical assistance can help MSMEs achieve the above goal - there are no structural potential for local MSMEsto capture more value added constraints outside the scope o f the project that would prevent success commitment o f key industry stakeholders Finally, the project involves a new collaboration between IDA and IFC which i s intended to provide a learning agenda o f successful commercial approaches to MSME development. To keep this learningagenda at the forefront, the project will at its outset undertake to implement some "first mover" initiatives. These initiatives are designed to provide demonstration opportunities that will help to establish a commitment among succeeding beneficiaries to the mainstreaming of internationally recognized best practice models and the mobilization o f increased private sector investments into MSME development. To this end and, subject to the agreement and due - 7 - diligence o f the Federal Government o f Nigeria, initial allocations o f funding will be made to provide capacity building and technical assistance support to the following "first movers" covering all components o f the project: Access to Finance: A proposal from a group of Nigerian commercial banks, their technical partner/investor, Americans for Community Cooperationin Other Nations (ACCION), and International Finance Corporation (IFC) to establish a new microfinance company; BusinessDevelopment Services (BDS): Proposals from two BDS providers, Support and Training Entrepreneurship Program (STEP) and the FATE Foundation to pilot commercial BDS provision intarget States; Support to BDS providers operating at critical points inthe catfish farming value chain where the potential exists for MSMEs to increase performance and capture an increased share o f value-added. Investment Climate: Business registration reforms with the Corporate Affairs Commission (CAC) and the Federal InlandRevenue Service (FIRS). Public-Private Dialogue: Public-private capacity buildinginitiatives with the Small and MediumEnterprises Development Agency o f Nigeria (SMEDAN) and the Nigerian Investment Promotion Commission (NIPC). The access to finance and BDS "first mover" initiatives involve IFC partners. This is being done because o f the potentially strong impact that these initiatives can have on overall project performance. The arrival o f internationally recognizedpractitioners and investors such as ACCION and IFC into the Nigerian micro-finance sector will provide a strong positive message to other partners and investors, strengthening market confidence. Additionally, these initiatives, including with the BDS providers, will be used for training purposes to assist project stakeholders (both implementing agents, such as Nigerian Investment Promotion Commission (NIPC) and the Project Management Unit (PMU), and other potential beneficiaries) to develop their understanding and expertise with performancegrant agreements and commercial approaches that combine sustainability and outreach targets. The IFC partner intermediaries involved inthe first moving initiatives will be requiredto fully satisfy the applicable eligibility and performance criteria and comply with the established remedy procedures in the event o f non-performance as would be applied to any other subsequent beneficiaries. These eligibility and performance criteria are set out inAnnex 11. Full disclosures and mitigation actions for potential conflicts o f interest regarding potential IFC investments and IFC partners that could benefit from funding through this project are set out inAnnex 15. - a - C. Project Description Summary 1. Project components (see Annex 2 for a detaileddescription andAnnex 3 for a detailed cost breakdown): The project will comprise five components: (i) to finance; (ii) access business development services; (iii)investment climate; (iv) public/private sector partnership development; and (v) monitoring and evaluation. ProjectComponent 1: Access to Finance (IDA US$10 million; Other US$23 million) This component will seek to deepen andbroaden the financial services available to MSMEs. This will be achieved through the provision o f grants to assist qualifying institutions and companies to provide up to four types o f commercially sustainable financial services to MSMEs. These grants will be usedto finance technical and capacity buildingassistance to the providers. The allocation and disbursement o f these grants will be governed by conformity to eligibility criteria and performance targets, as set out inperformance agreements to be signed between the financial intermediary and the Government executing agent or its designated representative, i.e. the Project Management Unit. This component will support the following activities: (a) Establishment of local commercially viable, regulated, micro-finance companies. IDA resources will be available to cover the provision o f technical experts, operational and some capital costs over an initial period untilthe micro finance companies build up their loan portfolio and sufficient funds to cover their operational and capacity buildingrequirements. Allocations from the project will be based on conformity with eligibility and performance criteria based on CGAP best practices and industry standards. A "first mover" inthe form o f an initiative led by a number o f Nigerian commercial banks together with ACCION International, incollaboration with IFC, i s under consideration for funding, subject to fulfillment o f the eligibility and performance requirements. The intention i s for this initiative to "set the bar" interms o f conformity to the eligibility and performance criteria established for this project sub-component. Subsequent allocations from this project component for the establishment of additional micro-finance companies will be determined on the basis o f proposals submitted inresponse to requests for expressions o f interest to potential investors and technical partners. These proposals will be assessedon basis o f the same established eligibility and performance criteria. (b) Technical skills transfer programs that incorporate new systems and lending methodologies to support commercial banks to expand their loan portfolio to MSMEs. This technical assistance and capacity building support will be available based on : (i)cost-sharing arrangements, reflecting participating banks' strong corporate commitment to extend further into the MSME credit market (outreach); and (ii)performance agreement that incorporates a commercial banks' adoption o f best practices that would lead to sustainable operations. (c) Support for the establishment o f private credit bureau(s) over an initial set-up period until a bureau establishes a revenue flow from its services. Such support would be based on specific commercial sustainability and related outreach criteria. There is currently a potential investor specialized in credit bureaus - incollaboration with IFC - considering a possible investment in a new credit bureau inNigeria. Inview o f the existence o f a credit risk management system - 9 - (CRMS) within the Central Bank o f Nigeria, stakeholders will also be investigating the options and feasibility o f a public-private sector collaboration consistent with the objective o f establishing a commercially sustainable credit bureau. The project will also be assessing the legal and other enabling changes that are required for a private sector credit bureau to be able to succeed commercially. (d) Specialized technical assistance to selected firms providing long-term leasing services. This support would be subject to eligibility and performance criteria. For this sub-component to be activated, key reforms inthe legal, tax and regulatory environment will need first to be addressed. Over the start-up phase of the project, the primary focus will be on the first o f these four services, Le., the establishment o f microfinance companies. This recognizes the fact that the enabling environment for the creation o f micro-finance companies i s supportive. The Nigeria "Banks and Other Financial Institutions " decree allows for the provision o f a finance company license that entails minimumcapital requirements suitable to micro-finance operations. Additionally, the Central Bank o f Nigeria has recently supported actions that allow commercial banks to invest in micro-finance companies (see Section C. 2 below). Finally, there i s good evidence that sound technical partners as well as investors are inthe market looking to collaborate inthis arena. Once further analysis i s completed on the market players and enabling environment for the other services, the project will extend its reach into these other service areas. Project Component2: BusinessDevelopmentServices (IDA US$12 million, Other US$4 million) This component will seek to develop the market for business development services (BDS) by supporting intermediaries to respond to unmet MSME demand for BDS focusing on the three target States. This will be done through the provision o f grants and technical assistance to qualifying institutions and companies to develop products and to strengthen their operations in order to be able to respond commercially and over a sustained period to market demand. The grants will be used to finance capacity building assistance to the providers. The allocation and disbursement o f these grants will be governed by conformity to eligibility criteria and performance targets, respectively, as set out inperformance agreements to be signed between the intermediary and the Government executing agent or its designated representative, Le., the Project Management Unit (PMU). The project will support two broad categories o f interventions: (a) IndustrySupply-Chain Development: the project will combine an industryfocus and market development approach to the provision of BDS. Specific initiatives will be supported based on: (i) identification o f industries with growth potential; (ii) analysis o f the constraints an that firms along the supply-chain inthe industry are facing; and (iii) the implementation o f sustainable and cost effective mechanisms to increase the quality and availability o f BDS as well as the demand for such services. IDA funds will be made available to support, e.g., enterprise service product development, market and technology information service development and - 10- mainstreaming, and membership activities o f industry and other related business associations in order to improve the availability and quality o f inputsand services demanded by MSMEs seeking to grow their business within the industryvalue chain. (b) BDS Fund - IDA resources will be utilized to buildthe capacity o f BDS providers to develop certain core products to meet excess M S M E demand intargeted States. Requests for fundingproposals from BDS providers seeking to deliver these services into the target markets will be launched semi-annually. Successful beneficiaries will needto demonstrate: (1) clear market demand for the service proposed; (2) lowest cost compliance with technical criteria; (3) substantiated evidence that they possess -or have a credible program to develop- the institutional capacity to deliver on a performance-based agreement; and (4) a business strategy for commercial viability. Inthe initial start-up phase of the Fund, FGNconcurrence i s being sought to provide fundingto selectedIFC BDS partners subject to conformity with agreed-upon eligibility and performance criteria. The intention i s for these first moving initiatives to provide a demonstration effect. Subsequent allocations from this project component will be based on the semi-annual qualification process. Some services required under this component will be contracted in accordance with IDA procurement procedures, rather than through a performance grant agreement. This will be the case where the service required has a large "public good" content and i s clearly not amenable to cost recovery from the sale of the service to MSMEs, e.g., market surveys and other research and analytical work. A learning agenda will also be drawn from the lessons learned from these two BDS components. The recently created Small and Medium Enterprises Development Agency o f Nigeria (SMEDAN) will be responsible for taking a lead on this learning agenda, including its mainstreamingthrough the planned Annual M S M E Competitiveness Report and related activities that SMEDAN will be preparing and organizing, in collaboration with other M S M E stakeholders with support from this project (see Component 4). Over the initial start-up phase, the project will focus on: (1) industry, BDS market and product assessments; and (2) mobilization o f first moving activities, including inthe catfish farming industryand with the BDS intermediaries STEP and FATEFoundation (subject to these organizations satisfying the eligibility and performance criteria established for the BDS Fund). ProjectComponent3: InvestmentClimate (IDA US%5.1million, Others UW0.7 million) Technical and capacity building support will be provided through the IDA credit to assist in the following initiatives o f the Government o f Nigeria. (a) RegistrationReform: project resources will be utilized to: (1) streamline the company registrationprocess and modernize and decentralize the information systems o f the Corporate Affairs Commission (CAC); (2) facilitate the creation in some businessmembership organizations o f the necessary infrastructure to assist local enterprises access CAC's services; and (3) conduct awareness raising programs to increase MSMEs' understandingon the role and services o f C A C - 11 - and the benefits o f registration. The project will also explore opportunities to streamline the overall business registrationprocess by combining company, tax/VAT, and foreign direct investment registrations. (b) Commercial Dispute Resolution: IDA resources would finance, inpartnership with and buildingon the work done to date by other stakeholders, an in-depth assessment o f alternative resolution - including arbitral enforcement - can be improved inways that can measurably lower dispute resolution (ADR) mechanisms and other means through which commercial dispute the burden and risks faced by MSMEs seeking legal recourse inNigeria. On the basis o f this assessment and discussions with relevant stakeholders inthe target states, it i s envisioned that a program o f initiatives will be developed to facilitate improvements in commercial dispute resolution for MSMEs within Nigeria. These initiatives could include train-the-trainer programs for alternative dispute resolution mechanisms (such as mediation and arbitration), court watch, and other judicial benchmarking activities. (c) Leasing Services: Further to a diagnostic study into the leasing industry that has been completed during the preparation o f the IDA credit, IDA resources would finance agreed upon technical assistance work for developing the laws and regulations together with a training program to ensure that the opportunities and implications o f the legal and regulatory reforms are fully understood by relevant stakeholders including financial institutions, MSMEs, commercial lawyers, judges, tax authorities, and other relevant agencies o f government. The project will also support efforts to strengthen public-private dialogue on the further development o f a market-driven commercial leasing industry, including with ELAN(Equipment Leasing Association o f Nigeria). (d) Credit Bureau: The credit risk management system (CRMS) currently operated by the Central Bank o f Nigeria (CBN) has not managedto generate demand from the banking community and has, to date, been usedprincipally to assist the C B N in its supervisory functions. An IFC-financed study, which will further document the experiences with the CRMS, will make recommendations on the advisability of and investor interest inestablishing a private credit bureau. Project resources would be available to develop and implement the legal reforms necessary to facilitate improvements inthe enabling environment that would strengthen the commercial viability o f possible private sector bureaus and utilization o f credit bureau services. (e) Secured Transaction System: A study on the improvement o f the legal moveable collateral regime i s underway. The study will assess the requirements and options for the development o f a system which includes efficient procedures for collateral registration as the basis for resolving priority disputes and, in case of default under the financing agreement, enforcement of rights against moveable collateral. The assessment will also look at the feasibility and options for designing a regime that can allow for enforcement o f rightsthrough a private contractual arrangement without recourse to the justice system and, as an alternative, through.expeditious summary court proceedings. Fundingwould be made available for the design and implementation o f a viable regime, including hardware and software system that could be used for an integrated registrationcovering various forms o f moveable collateral (including leasing). IDA resources will be provided also to develop the necessary laws and regulations, facilitate the mainstreaming - 1 2 - through seminars and capacity buildingactivities with principal stakeholders. Over the start up phase o f this project, the focus will be on implementing the business registration sub-component, which i s the "first mover" under this Investment Climate component. As the initial assessment work and stakeholder consultations are completed, these other components (commercial dispute resolution, leasing, credit bureau and secured transactions) will be defined and made operational. The emphasis for this component is to identify specific constraints facing MSMEs within the investment climate and address them in targeted ways that result inmeasurable benefits to the M S M E sector. ProjectComponent 4: PubIidPrivateSectorPartnershipDevelopment(IDA US$1million,Others UWO.1million) IDA resources will be allocatedto provide selected Federal and target State Government Agencies with M S M E development responsibilities the opportunity to access global best practices. Specifically, advisory services would be available to provide best practice capacity-building to institutions with policy and related responsibilities for the M S M E sector. This will include seminars and other focused short-term in-country training and study tours linked to the mainstreamingof best practices in access to finance, BDS, investment climate and promotion o f private investment into the M S M E sector. This learning agenda will be tailored to the preparation o f an annual M S M E Competitiveness Report that will involve close public-private collaboration. Target FGN institutions can chose to opt-in to a two-phase program o f capacity building. The first phase entails an institutional assessment o fthe role, responsibilities, modus operandi, and a preliminary assessment o f performance relative to best practice benchmarks. The second phase involves the provision o f more extended technical assistance which would support the institutionto develop and implement a business plan to improve institutional effectiveness through the strengthening and/or reform o f selected programs and operations that impact the private sector. Over the initial phase o f the project, the capacity buildingwill focus primarily on the Small and Medium Enterprise Development Agency (SMEDAN) and the Nigeria Investment Promotion Commission (NIPC). Duringthe first year o f project implementation diagnostic work will be undertakenwith the relevant government agencies in the target States to determine what support can be provided to best assist in augmenting effective dialogue and consultations with the private sector in order to improve the business climate for MSMEs. This will be closely linked to the completion o f regular cost of doing business surveys. Project Component 5: ProjectManagement,Monitoringand Evaluation(IDA US$2.3 million,Others US0.2 million) IDA funds will be allocated to finance the execution, reporting, review (semi-annual and mid-term)and monitoring of project components and independent evaluations o f selected issues, particularly through case studies. Provisions will also be made for equipment and operational costs and other financial, audit, training and consultant assignments as required and laid out in the approved annual procurement plan. - 13- Approximately US$1.6 million will remain unallocated but available to finance the above components, subject to results from project monitoring and evaluation reports. The allocation for the project components includes a Project Preparation Facility amounting to US$600,000. Indicative Bank- % of Component costs %of financing Bank- (US$M) Total (US$M) financing Access to Finance 33.00 55.0 10.00 31.3 Business Development Services 16.00 26.7 12.00 37.5 InvestmentClimate 5.80 9.7 5.10 15.9 PublicPrivate PartnershipDevelopment 1.10 1.8 1.oo 3.1 Project Management, Monitoring, Evaluation 2.50 4.2 2.30 7.2 Unallocated 1.60 2.7 1.60 5.0 Total Project Costs 60.00 100.0 32.00 100.0 Total Financing Required 60.00 100.0 32.00 100.0 2. Key policy and institutional reforms supported by the project: The project focus is principally at micro-economic firm level through a private sector driven strengthening and creation o f institutions that provide services to MSMEs. Attention i s being paid to ensure that project targets - interms o f firm performance and capacity building to intermediary institutions - can be met within the existing broader macro-economic and institutional environment. As a result, the project will not operate in industryvalue-chains where these broader issues currently present a significant risk to project effectiveness, nor will it seek to develop institutions where the core policy, legal and regulatory environment i s not propitious. However, where modest changes to existing policies, laws and regulations can make it possible for the project to carve out an effective role, every effort will be made to bring about these changes. This is the case for the SMIEIS initiative, where the Central Bank o f Nigeria, incooperation with the Banker's Committee, have agreed to revise the SMIEIS guidelines to allow for commercial banks to invest up to 10 percent o f the funds generated by this program inMFIs. Inresponse a number o f commercial banks inNigeria are investigatingthe potential o f establishing new micro-finance companies (including those that are considering an investment with ACCION and IFC. Other banks are consideringthe development o f downscale small business lending operations. Similar such initiatives are being considered by other investors and technical partners. This proposedproject seeks to encourage these efforts through the support it can provide inthe set-up stage o f such ventures. Inadditionto these policy and institutionalreforms, other selectedmeso-levelreforms are being targeted by the project. This includes legal and regulatory changes to business registration procedures, leasing and collateral laws and practices and commercial dispute resolution. The successful implementation o f changes in these areas can lay the foundation for further institution - 1 4 - and market buildingin support o f M S M E development. 3. Benefits and target population: intermediationand BDS provision in support o f the M S M E sector. This - together with The Project i s expected to foster a vibrant and commercially sustainable deepening o f financial improvements inthe financial legal environment, reforms to business registration and commercial dispute resolution - will serve to generate investment, employment creation and productivity improvements in the M S M E sector, particularly in target industries and in selected States o f Abia, Kaduna and Lagos. The project would provide significant benefits to the following three primary groups: Firm: MSMEs inthe non-oil sector, where the MSME is defined inaccordance with the expanded definition o f MSMEs provided inthe Small and Medium Industries Equity Investment Scheme (SMIEIS) adopted inNigeria in 1999. This includes any enterprise with a maximum o f 300 employees and an asset base o f up to Naira 200 million, excluding land and working capital. Market Intermediary: Institutions and enterprises providing financial and non-financial services to the MSMEs, particularly those providers operating in the target States. Government: Selected FGNagencies with responsibilities for MSME development. Secondary beneficiaries will include employees o f MSMEs, intermediaries and government agencies receiving support directly or indirectly from the project. The project will contribute to poverty reduction through the impact that project-induced M S M Ejob creation has on poor households and the extent to which improved products being provided by M S M E project beneficiaries are consumed by these households. It is not possible ex-ante to provide a detailed indication o f the numbers o f firms and intermediaries that are to benefit from the project (refer to Annex 16). This will be determined over time as target industries are identified and the activities required to support their growth are defined. As a result o f the reforms to the registration system which will bringmore firms into the formal sector, plus increased revenues o f existing formal firms and intermediaries supported by the project, it is anticipated that there will also be a positive tax revenue stream flowing from the project's activities. 4. Institutionaland implementationarrangements: Implementation Period: Five years June 2004 - June 2009. Implementation Arrangements: The overriding principle guiding the institutional and implementation arrangements for the project i s the government's delegation o f maximum feasible operational independence and responsibility to the private sector. A schemata o f the project's implementation structure i s set out inthe table below and Annexes 13 and 14 further describe the institutional arrangements. - 15- Nigeria MSME Project Implementation Organigram Financial Management Review Committee public-private membership Special Account Project Management Unit: Procurement; Communications, Monitoring and Evaluation, BDS Fund, TA I Access To Finance I I BDS lndustrv I - 1 BDSFund I Microfinance Proposal 1 Registration Proposal 1 Industry 3 Proposal 3 Leasing co. - Industry 4 Proposal 4 Credit Bureau & Leasing Proposal 4 I ' I FundsFlow Functional Relationship Transactions The Nigerian Investment Promotion Council (NIPC) will serve as Government's executing agency (EA). The NIPC will have project oversight responsibilities on behalf o f the FGNand will be the contractual client ofthe PMU. It will provide the financial management services for the project. The NIPC will also be responsible for coordination across Federal and State Government agencies inrespect o f the project activities and will participate as a member o f the Review Committee. For an interim period - in order to allow for more immediate start-up of project activities - the NIPC will perform the P M U functions, untilthe P M U can be recruited and established. Support to ensure appropriate implementation capacity exists inNIPC will be provided through the Project PreparationFacility. A Review Committee, comprising a majority o frepresentatives from the private sector as well as key government representatives (NIPC, CBN, MOF), will: (1) provide strategic guidance to the EA; (2) review and select fundingproposals in accordance with the Project Implementation Manual; (3) review the annual progress reports; and (4) address any major problems affecting project implementation. A PMU, which will be a private sector firm (competitively selected), will ensure that the operational, monitoring, reporting, procurement and outreach and communications requirements of the project are implemented inaccordance with the Credit Agreement and the Project ImplementationManual (PIM). It will also provide selected technical expertise, particularly to the BDS and monitoring and evaluation components o f the project. At the conclusion o f the - 16- project, it i s anticipated that the P M U will cease to exist and the activities that it has been supporting through project funds would continue to be provided, where required, on a commercial basis. These three entities will be strengthened on a continuous basis through appropriate training. The delivery o f the technical services providedby the project will be primarily through performance-based contracts and grant agreements with firms and other organizations (business membership organizations, NGOs). Inaddition, certain core expertise will be provided directly by the PMU. This includes a BDS specialist to manage the BDS Fundwithin the P M U and provide other BDS technical services related to the industry component. A Project Implementation Manual has been draftedby NIPC andwill be finalized betweenNIPC and the P M U in consultation with IDNIFC. This Manual will provide: (i) a detailed description of the roles and responsibilities o f the implementing agents (NIPC, P M U and RC); (ii) the institutional and operational guidelines for each component o f the project including a procedures manual for the grant component o f the project; (iii) a specification o f the different activities, types and sources o f technical expertise, budget requirements and delivery milestones for the first year o f initiatives to be launchedunder each project component; and (iv) detailedproject performance framework (indicators and targets) and implementationmanual. The implementation o f the grants components o f the project will be in accordance with a Grant Procedures Manual that will be incorporatedin the Project Implementation Manual. The key features o f the grants procedure are: (i) allocations under the Access to Finance and BDS components o f the project made on the basis o f eligibility and performance criteria and disbursed based on measurable triggers set out in a performance agreement; (ii) review o f proposals for both access to finance and BDS by the PMU, with technical advice from specialists provided through the project; (iii) the Executing Agent will review and approve all allocations for amounts over $100,000 up to $150,000 and the Review Committee will review and approve all allocations over $150,000 subject to Executing Agent's recommendation. Below this amount the P M U will be responsible for finalizing allocations under the grant program; (iv) there will be semi-annual reviews o f the grant program portfolio by the Review Committee. This will also allow for an ongoing assessment o f the PMU performance managing the grant operations in order to ensure that the grant program stays on track and remedial actions can be taken promptly as required. Project Monitoring and Evaluation: NIPC, the PMU and the RC will meet twice a year to review progress inproject implementation, share accomplishments, identify problems and agree on remedial actions. IDA supervision missions will be scheduled to coincide with these consultative reviews. A mid-termreview will be conducted to evaluate progress on implementation and determine whether the project should further extend its operations countrywide within 24 months after effectiveness, seek supplemental funding, or refocus. Quarterly progress reports will provide the basis for project monitoring and operational reviews. The P M U will be responsible for monitoring project activities and the EA will monitor overall project progress in line with the PIM and annual workplans. Project evaluations - addressing efficiency, effectiveness and impact criteria - will be carried out by independent specialists in - 17- accordance with the performance framework and its implementation plan. The P M U will be tasked with developing and populating the database required for the evaluation plan to be implemented. RPED will assist inthe development o f the performance framework and data requirements and the costhenefit analysis undertaken o f project impact. The evaluation plan will include bi-annual independent operational audits o f efficiency and effectiveness parameters o f the project. The first o f these audits will be prepared for the Mid-Term Review. A key challenge for the project will be to assess project impact. This will require, inter alia, a determination be made as to whether the grant provided by the Government through this IDA credit resultedin sustained improvements in firm performance, additional to what would have been achieved without the subsidy. To address this question it i s necessary to compare with both "before and after" (assess target firms benefiting from the project both ex ante and ex post) and "with and without" (assess target firms performance relative to those who have not benefited from the project) controls. Two other major issues will need to be borne in mindwhen trying to isolate the effects o f the project: (i) needto control for other factors in the the enabling environment that may be affecting firm performance, inaddition to the project; (ii) the difficulties posed by selection bias, inthat firms benefiting from the project will tend to be ones that are more successful in the first place, bringinginto question the additionality generated by the project grant (refer to Annex 12) . Financial Management Arrangements. The Finance Department o f NIPC (FDNIPC) will be responsible for managing the financial affairs o f the project. F D N I P C i s staffed by relevant qualified accountants. Modern internal audit functions would be performed by the Internal Audit Unito fNIPC (IAUNIPC). FDNIPC will be responsible for ensuring compliance with the financial management requirements o f the Bank and the Government, including forwarding the quarterly financial monitoring reports and audited annual financial statements to IDA. The project will follow disbursement procedures described inthe World Bank DisbursementHandbook. Regarding flow o f funds and banking arrangements, IDA will disburse the credit through a Special Account (SA) maintained for the project by FDNIPC. Also, F D N I P C will maintain adequate FM arrangements to support the deployment o f project resources in an economic, efficient and effective manner to achieve the stated development objectives. The arrangements will also provide relevant information to NIPC and R C to facilitate the performance o f their oversight functions. Experiencedand well qualified external auditors will be appointed (on a TOR acceptable to IDA) to audit project accounts, financial statements and transactions irrespective o f the source o f financing. D. Project Rationale 1. Project alternatives considered and reasons for rejection: Considerationwas given to a Private Sector Development (PSD) project comprising a more integrated program o f policy and institutional reform in support o f private sector development. Such an operation would require a longer preparatory time. Inview o f the World Bank Group's interest in showing support to the private sector reform agenda o f the new Federal administration and the additionalpolicy dialogue and implementation hurdles involved ina larger, more complex program, it was decided that the best approach was a two step action. - 18- The first step would be to initiate a more narrowly focused capacity buildingproject targeting the crucial M S M E sector through more incremental and transactional activities. Diagnostics and consultations in Nigeria revealed a strong stakeholder demand to see the World Bank Group engaged inthis sector o f the economy. Such a project would also provide a foundation on which assess public and private sector absorptive capacities, both at the project and policy reform levels. This experience, together with the work being done inthe Privatization Support project and the Competitiveness Forum Working Group Initiative would contribute considerably to discussions with the FGNon the desirability and feasibility o f developing a subsequent IDA credit in support o f a more comprehensive trade and investment agenda. Once the decision was taken to design this IDA credit as the first mover ina series o f Africa-wide M S M E projects, under the umbrella o f the proposedProgram Framework Paper for a Joint IDMFCMicro, Small and Medium EnterpriseDevelopment Pilot Programfor Africa, a number o f scope and design implications ensued. A core objective o f the Pilot Program i s to replicate specific types o f M S M E best practice models drawn from global experience. These models focus on financial, BDS and targeted investment climate reforms. There are other outstanding PSD issues that justify support inNigeria but, in recognition o f the complex operating environment inthe country and in order to remain focused on a manageable set priorities, it was decided to keep the focus on the priorities set out in the Pilot Program. These are substantial issues in and o f themselves inNigeria. This strategic choice also serves to reduce the complexity o f the project. Consideration was also given to the preparation o f a smaller Learning and Innovation Loan (LIL) initiative, focused on a single State. This would have also helped ensure that the project was kept as simple as possible and would have contributed to a faster preparation timeline. However, this could have left potentially innovative initiatives involving high-impact collaborationbetween IDA and IFC outside the project scope. On the other hand, nationwide coverage can raise initial expectations too much and result in the deployment o f a relatively modest IDA credit across too many disparate activities and locations. This could over-stretch project management capacity and compromise project performance at outcome and impact levels. Inview o f these considerations, a decision was taken to target three States and, subject to progress made with this project, give considerationto extending project scope and outreach at a later date. Duringpreparation, the IDA team, inconsultationwith the FederalGovernment, considered the option o f introducing a matching grant program which would have provided grants directly to MSMEs to purchase BDS services. This i s a mechanism that a number o f other countries in Africa have introducedwith the support o f IDA. However, given the range o f new instruments and initiatives being launchedunder this pilot project, after consultations with the Government, it was decided to focus initially solely on providing grants to the intermediary and not the MSME. This approach will be assessedat the time o f the Mid-TermReview to determine whether it is obtaining the results intended. At that point, depending on performance and an increased understanding o f the markets inwhich the project i s working, considerationmay be given to introducing a matching grant scheme. -19- The initial design o f the project envisionedno operational links between the private sector and public sector. O n further consideration and after consultations with the borrower, a public-private capacity building component was incorporated into the project. This was in recognition o f the need to strengthen public sector exposure to M S M E development best practices as a means to foster more effective collaboration between Government agencies and the MSMEs population. This will havebenefits also to project effectiveness. Nevertheless, the public-private dialogue in Nigeria i s burdened by an extended past period o f mutual distrust. Reform efforts inthe public sector are at an early stage and this project does not have the mandate or the resources to provide a comprehensive response to the challenge of improving the public-private dialogue. What i s intended i s to provide some targeted and limited support in instances where selected Government agencies are interested complying with performance-based agreements targeted at bringingtheir M S M E operations further in line with best practices. 2. Major relatedprojectsfinanced by the Bank and/or other development agencies (completed, ongoingand planned). Latest Supervision Sector Issue Project (PSR) Ratings (Bank-finance projectsonly) Implementation Development Bank-financed Progress (IP) Objective (DO) Private sector led growth, access to Private Small andMedium U S financial resourcesby industries and EnterpriseDevelopment Project enterprises Privatization Support Project U S %her development agencies Sustainable microfinance operations USAID-Capacity Buildingfor Microfinance Institutions Agro-business sector development DFID - PropCom; USAID - TA to Agri-business Sector Private enterprise development GTZ Private Sector Development Project UNIDO - Cluster Development program (Highly Unsatiz 3. Lessonslearned and reflected in the projectdesign: The project has been designed drawing on expertise from the World Bank FPSInetwork, the IFC Africa regional and capital market teams, the SME Global Product department, FIAS and the PSD Investment Climate unit. Inaddition, the project team has drawn extensively on PSD IDA project and sector experiences inNigeria and elsewhere and on knowledge obtained from other donor and internationalbest practices. The project design reflects six key lessons learned: (i) market-developmentapproach: Theprojectfocusesmostdirectlyontheintermediaries providing services to MSME, rather than the enterprises themselves. Aid funding i s often a poor instrument through which to directly support enterprises. On the other hand, evidence indicates - 20 - that more upstream support creates a sustainable market for the demand and supply o f services transacted between private actors and enhances outreach and impact. (ii) private over public sector leadership: The project places a heavy reliance on private sector delivery channels in order to promote responsiveness to enterprise demand and commercial sustainability. Limited role for government, recognizing the constraints in scope and quality o f most services provided by the government and the institutional absorptive capacity o f government agencies. (iii) performance grant agreements: Utilize performance agreements with intermediary service provider beneficiaries in order to re-enforce a commercial and results focus to project-funded activities. Cost sharing o f 50 percent will be required o f intermediary beneficiaries. Inthe case o f a competitive selection process, for a given set o f results, the proposal requiring the lowest grant with the clearest and most robust exit strategy will be selected for support by the project. (iv ) greater access to a range of key services to MSMEs: A principal conclusion o f reviews o f M S M E interventions, including from ImplementationCompletion Reports (ICRs) o f IDA projects, i s the diminished results that accrue where MSMEs are unable to access the full range o f services they require. Finance without the right technical assistance has been a common failure in IDA lines o f credit and the evidence is very strong that active interventiondoes not work unless the basic environment for the private sector i s inplace. Inlight o f this evidence, this project strives to increase access to all the key services required by the M S M E and tackle some o f the leading investment climate constraints. (v) industry focus: better results have been realized where B D S are directed to particular industries. Inview o f this, the project i s targeting resources at particular points o f demand inhigh growth potential industry value chains. The linkages between firms inthese value chains increases the absorptive capacities for know-how transfer and uptake and therefore probability o f project realizing objectives o f technical assistance. (vi) specialized financial products: there i s a growing body o f successful experiences providing small business loans profitably - either through micro-finance institutions entering the market or through commercial bank downscaling. These experiences are drawn predominately from experience inLatin America and Eastern Europe. The critical factors underlying these success stories are often less to do with the injection o f new liquidity and more to do with the application o f a new technology, the introduction o f new corporate incentives, the development new staff skill sets and the provision o f institutional support to staff responsible for MSME lending portfolios. Intransferring and replicating these models inNigeria, this project will focus particular attention on these capacity building considerations. -21 - 4. Indications of borrower commitmentand ownership: The Federal and relevant State Governments have expressed a strong interest in working with IDA inthe designand implementationo fthis MSME initiative. Inview o fthe recent State and Federalelections over the past six months and the time that these major political events demand o f policy makers both before and after the actual elections, the pace o f the preparation o f this project has been considerable. The FGNhave endorsed the private sector philosophy o f the M S M E project. Their willingness to borrow IDA funds to provide technical assistance primarily to private sector intermediaries, without recourse to subsidiary credit agreements with the State Governments or with other statutory bodies (NIPC, CAC) that will benefit from the project, further confirms their ownership o f this project. The Letter o f Sector Policy with its advocacy of market solutions and private sector leadership inthe M S M E sector provides further articulation o f the FGNcommitment to the principles and objectives o f this IDA initiative. Inadditionto the considerableNIPC-led consultationthat has taken place with private andpublic stakeholders in the diagnostic and eventual design for this project, the CBN has played a notably constructive and enabling role. A most tangible example was the recently issued statement that, within given limits, commercial bank investments inmicrofinance would be consideredto be in compliance with the Bankers Committee requirements on the use o f the SMIEIS funds. The target States will contribute to the program through their commitment to support the investment climate components o f the project and associated activities, including the completion o f State-level "Cost o f Doing Business" surveys which will be updated on a regular basis. 5. Value added of Bank supportinthis project: Under the project, the World Bank Group will provide essential financing and technical support to hone and implement best practice interventions in support o f M S M E development inNigeria. As part o f a broader Africa-wide pilot program, this project will benefit - inboth preparationand supervision phases - from an enhanced partnership between IDA and IFC. The advantages are three-fold: (i) Increased capacity to leverage strategic investors and investment funds inconcert with the IDA credit which is made possible from a closer linkage betweenWB advisory and IFC transactional expertise, as i s the case with the proposed ACCION initiative; (ii) Economies o f scale inknowledge acquisition and transfer resulting from the World Bank and IFC experiences with internationally recognizedbest practice technical partners - implementation o f similar projects systematically across multiple countries -buildingjointly on will provide major opportunities throughout the life o f the project to mainstream learning and reduce costs o f replication and scale-up; (iii) BycombiningIDAandIFCexpertiseandconveningpower,theprojectcanbettersupport the FGNin its efforts to foster private-public sector dialogue, private sector investment and more effective donor coordination. This project is also beingdesigned to mobilize certain initiatives on a fast track to achieve an earliest possible set o f results that can then "set the bar" and serve as demonstrationeffects for the remainder o f the project. - 22 - E. Summary Project Analysis (Detailed assessments are inthe project file, see Annex 8) 1. Economic(seeAnnex 4): 0 Costbenefit NPV=US$million; ERR = % (see Annex 4) 0 Costeffectiveness 0 Other(specify) The cost-benefit analysis o f this pilot M S M E project presents some limits not only due to its innovative nature in Sub-Sahara Africa but also to the lack o f data on the M S M E sector. The difficulty in quantifying the economic benefits results mainly from the indirect relationship between the technical assistance, which represents a large part o f the project, and the stream o f benefits; and from the lagged effects o f the project. Nevertheless, a cost-benefit analysis has been carried out to calculate the Net Present Value (NPV) and Economic Rate o f Return (ERR) in a "with" and "without" project framework. The numeraire used inthe objective function is output, which i s expected to grow mainly as the result o f (i) improved capacity utilization and efficiency of the supported MSMEs; (ii) greater access to finance for productive activities; and (iii) streamlined investment climate. After runninga simple model calibrated usingavailable data and based on conservative assumptions, the project generates a net present value estimated at about US$35.6 million corresponding to an intemal economic rate of retum of 26.2 percent. The project i s expected to have a positive impact on employment as a result o f acceleration o f output growth in the pilot areas where a minimumof 4,770 jobs are expected to be created by supported MSMEs. 2. Financial (seeAnnex 4 and Annex 5): NPV=US$ million; FRR= % (see Annex 4) Considering the project finances mainly capacity buildinginitiatives, there are no clear, direct revenue streams, that would permit a straightforward financial analysis. Inthe absence o f major distortions, financial and economic costs and benefits are expected to converge towards each other. Fiscal Impact: The fiscal impact o f the project i s envisaged to be favorable. Improvements inthe business climate and inbusiness performance should generate additional tax revenues from the following sources: (1) incremental income taxes paid by employees; (2) corporate income taxes; and (3) registration fees generated by the CAC. 3. Technical: The project i s seeking to ensure appropriate technical standards are achieved in three ways: (i) partnering with international practitioners and technical experts with proven track records in successfully transfemng know-how through local capacity building; (ii) focus on commercial, a market-driven provision o f services will limit the creation o f grant dependency among beneficiaries and promote a demand responsiveness among service providers; (iii) developing specialized financial services for the M S M E market and targeting BDS to address specific industryneeds will increase quality, market relevance and uptake of services. The public sector role would be to: (i)revise public policies and regulations that produce hightransaction costs and - 23 - thus create a competitive disadvantage for MSMEs, and; (ii) government-sponsored review programs to ensure efficiency and avoid crowding out o f private initiatives. This strategy represents a fundamental shift inthe role o f the government, away from direct provision o f services and towards facilitating the development o f private markets and networks. 4. Institutional: Historically, Nigeria has been a very difficult place to implement projects and programs. Underlying reasons were: a poor and unstable macroeconomic environment, lack o f government commitment, counterpart funding problems, corruption, lack o f transparency, and frequent and disruptive changes inboth project personnel and the institutional environment. Some projects were poorly designed and supervised and/or lacked the active participation o f beneficiaries in project design or implementation. This project has taken into considerationpast implementation problems experienced inNigeria and elsewhere and factors bearing on successful M S M E operations worldwide. This i s reflected inthe emphasis on targeting private sector beneficiaries and relying on a private sector-led implementation strategy. The project will be implemented on a pilot basis in selected areas and industries to provide opportunities to test out models proposed to assist M S M E and ascertain commitment and implementation capacity o f the beneficiaries. It will be expanded and replicated countrywide when it can be demonstrated that measures taken inthe project best respondto minimizing the constraints to M S M E growth and sustainability. Section B.3(ii) and Annexes 11, 13 through 15 provide further detail on the institutional aspects o f the project. 4.1 Executingagencies: Overall project management, including all procurement, administrative, reporting, monitoring and evaluation functions, have been placed under the P M U reporting to the FGN Executing Agent. The ExecutingAgent will be responsible for the financial management o f the project. A Review Committee comprising public and private sector representation will provide strategic advice and approve grant and contract awards above a certain ceiling. Project components will be implemented through contractual and grant agreements with intemational and local technical partners under the overall management o f the P M U working with relevant government agencies and other industry stakeholders. (refer to Annexes 13, 14). 4.2 Project management: (See Section C.4 above and Annex 2) 4.3 Procurement issues: The FGNExecuting Agency (NIPC) shall have overall responsibility for management o f the project procurement activities. This responsibility will be discharged by a project Management (UnitPMU) a private consulting firmthat shallbe recruitedthrough competitiveprocess inline with the Bank's procurement Guidelines: Selection and Employment o f Consultants. All contracting will be carried out by the P M U in accordance with the operational guidelines set out inthe ImplementationManual. To ensure the appropriate procurement capacity is inplaceprior to project effectiveness, an assessment o f the procurement capacity o f the NIPC (as interim PMU) has been carried out inaccordance with Procurement Services Policy Group (OPCPR) guidelines dated July 15, 2002. The assessment outlines main issues and recommendations. For further details refer to Annex 6. The major procurement issues are: (i) lack o f adequate procurement - 24 - capacity at the project Executing Agency; and (ii) main implementation unit (a private the management firm) that will handle all project procurement activities i s not yet inplace. This risk i s addressed by making the selection and hiring o f the P M U a condition o f effectiveness. Capacity buildingwill be provided to NIPC to ensure that they can fulfill their procurement responsibilities duringthe period prior to the P M Urecruitment. 4.4 Financial management issues: NIPC/FD will be responsible for the financial management affairs o f the project. Although it has a strong finance department, its internal audit i s under-resourced and weak (internal audit i s generally weak inthe public sector). The Internal Audit Departmentunit therefore needs to be strengthened. Also, NIPC does not have any experience in implementing IDA-assisted projects. However, project implementation activities will largely be contracted to a firm o f consultants who would serve as the P M U for the project. The risk arising from the outside environment is assessed as high, based on the yet to be updated CFAA. Given such an environment, robust control arrangements that were found inNIPC/FD are necessary to ensure that funds are used only for the purpose intended. Additionally, the oversight functions to be provided by NIPC and R C will mitigate against weaknesses in the control environment and enhance the overall accountability arrangements for the project. There is a need to ensure a seamless flow o f information and rapid turn around between: (i) the consultants inthe PMU, which will handle project implementation activities; and (ii) FD/NIPC, which will perform all FMactivities. An adequate Financial Procedures manual will be developed specifically for the project. The Manual would detail the arrangements that are necessary to facilitate proper coordination between FD/NIPC and the PMU, and to ensure smooth project implementation. The manual will include service standards and necessary measures to ensure compliance with the standard. 5. Environmental: Environmental Category: C (Not Required) 5.1 Summarize the steps undertaken for environmental assessment and EMP preparation (including consultation and disclosure) and the significant issues and their treatment emerging from this analysis. Environmental Category: C (not required). 5.2 What are the main features o f the EMP and are they adequate? Not Applicable 5.3 For Category A and B projects, timeline and status o f EA: Date o f receipt o f final draft: Not Applicable 5.4 How have stakeholders beenconsulted at the stage o f (a) environmental screening and (b) draft EA report on the environmental impacts and proposed environment management plan? Describe mechanisms o f consultation that were usedand which groups were consulted? Not Applicable 5.5 What mechanisms have been established to monitor and evaluate the impact o f the project on the environment? D o the indicators reflect the objectives and results o f the EMP? Although the project i s not expected to present any specific environmental risk, IDA funds may finance services that may lead to adverse environmental impact. Inassessing potential beneficiary financial and business service providers, the PMU will review the environmental screening - 25 - mechanisms o f the applicants. Once service providers are selected as beneficiaries under this project, the PMU will make recommendations to build the their environmental screening and verification capacity, and ability to support and provide technical advise on relevant environmental aspects o f their clients' businesses and to link them with the appropriate Ministry and/or environmental protection agency. 6. Social: 6.1 Summarize key social issues relevant to the project objectives, and specify the project's social development outcomes. There are no social issues triggered by this project. A number o f project components are expected to lead to favorable social outcomes, principally: (i) employment creation; (ii) contribution to poverty reduction; (iii)institution-building within markets, civil society, the judicial system and within certain activities o f government. Project activities will provide short- to medium-term indirect social benefits resultingfrom increased investment and production and an overall stronger and broader economy. 6.2 Participatory Approach: How are key stakeholders participating inthe project? Workshops organized duringproject preparationand project launch with all the principal target groups for this project, Le., BDS providers and financial institutions (selected based on their support o f best business practices), FGN and State Governments, and business membership organizations, will provide the necessary fora to define and implement the project and make necessary mid-course adjustments to facilitate the realization o f the project objectives. In addition, a Review Committee comprising public and private sector representatives will provide the necessary strategic direction to resolve implementation issues. 6.3 How does the project involve consultations or collaboration with NGOs or other civil society organizations? Stakeholders, including relevant NGOs and business membership organizations, will be involved inworkshops targeted at project preparation, project launch, and reviews meant to buildon lessons learned and to make necessary mid-course adjustments to realize project objectives. 6.4 What institutional arrangements have been provided to ensure the project achieves its social development outcomes? (see Section 6.2 and 6.3 above) 6.5 How will the project monitor performance interms o f social development outcomes? (see the description o f Component 4 above) 7. Safeguard Policies: Policy Triggered Environmental Assessment (OP 4.01, BP 4.01, GP 4.01) 0Yes 0No Natural Habitats (OP 4.04, BP 4.04, GP 4.04) 0Yes 0No Forestry (OP 4.36, GP 4.36) 0 Yes 0No Pest Management (OP 4.09) 0Yes 0No Cultural Property (OPN 11.03) 0 Yes 0No Indigenous Peoples (OD 4.20) 0Yes 0No - 26 - Involuntary Resettlement (OP/BP 4.12) 0Yes 0 No Safety of Dams (OP 4.37, BP 4.37) 0Yes 0 No Projectsin International Waters (OP 7.50, BP 7.50, GP 7.50) 0Yes 0No Projectsin DisputedAreas (OP 7.60, BP 7.60, GP 7.60)* 0 Yes 0 No 7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies. No safeguard issues are triggered. F. Sustainability and Risks 1. Sustainability: The sustainability o f the project will depend critically on: (i) Government's agreement and adoption o f an arms-length approach to project implementation; (ii) the satisfactory achievement o f performance targets that measure the catalytic effects o f the initiatives to be taken inthe financial and BDS market; and (iii) the commitment o f the Government and the private sector to project goals, recommended reforms, and implementation arrangements. 2. Critical Risks(reflecting the failure of critical assumptions found inthe fourth column o f Annex 1): Assuming political stability inNigeria, the major risks facing the MSME sector inNigeria arise from the country's poor infrastructure and macro-economic uncertainty. These risks lay beyond the project purview. While it will not be possible to completely insulate project activities against these risks, the project will be assessing and selecting specific interventions based on the degree to which they can realize results despite these broader risks. Risk Risk Rating Risk Mitigation Measure :rem Outputs to Objective 3DS and financial products and services M Beneficiaries will be service providers (BDS and ire not responsive to MSMEs' needs. finance), who have a thorough understanding o f the constraints and requirements o f MSMEs and whose continued access to project resources is based on their responsiveness to these needs, their outreach, and their ability to meet performance indicators. The project will identify service providers that operate inmarket niches where there is potential for market development and providers that have a commitment to serve MSMEs. Mid-Term Review will also assess impact to date that support to the intermediary has had on M S M E performance. As necessary consideration will be given to altemative instruments, such as a matching grant program for the MSMEs. r'irms do not respond favorably to advice M Ditto. Inaddition, the P M U will design and and training received; do not seek the implementa communications package that - 27 - services provided by banks and BDS informs MSMEs o f products and services providers, nor increasingly utilize available through the project's beneficiaries. available technical, business and financial The project will also -via the P M U dialogue - services; instead, MSMEsprefer to extensively with NGOs and donors to achieve subscribe to free, highly subsidized, and consistency insubsidy levels and cost-sharing potentially less responsive programs. arrangements inthe areas where the project is beingimplemented. The monitoring and evaluation component will be developed and applied incollaboration with other donor programs to foster a coordinated and complementary approach to the provision of commercial services to MSMEs. Government is not committed to pursuing M Measures included inthe project include best a private sector model o f service provision practice eligibility and performance criteria to MSMEs, improving the investment managedby a private sector PMU. Inaddition, climate and lowering rent-seeking there will be close consultation with relevant behavior. government agencies; fora to dialogue and build up private/public sector partnership will provide opportunity to identify and resolve implementation issues. Inaddition, the project i s focusing on selected investment climate obstacles where government stakeholders show strong commitment and where reforms are practical and have good "win-win" potential for both the Government and the private sector. The Federal and or the State Governments M These reform programs are designed with close do not follow through with their attention to ensuringthe most effective incentive commitment to implement the agenda o f structures are inplace. Inthe case o f the investmentclimate reforms. financial sector reforms, this includes a very direct linkwith new investment and capacity buildingto foster growth inthe provision o f financial services. Inother cases the initiatives provide revenue flows and\or have strong stakeholder interest from the private sector and entail relatively straightforward actions that are not political sensitive but offer the potential o f capturing relatively short-term benefits. From Components to Outputs MFIs, banks and BDS providers do not M Communications component of the project will seek technical assistance on a timely basis foster private sector response to project services to implement project components; services are not deliveredeffectively. Payments on TA requirements and performance indicators loans and services are not received as (including outreach, portfolio quality and agreed with client firms profitability) will be agreed with beneficiary MFIs,banks, and BDSproviders prior to - 28 - receiving project support inorder to ensure supply response. Targeted matching grant program will be applied where firms show inability to pay for BDS services. These services will target productivity improvements to assist firms to meet loan obligations to financial institutions. Lack o f trust and demonstrated confidence S Public-Private Capacity Building component o f and cooperation betweenthe Government the project will provide important information and the private sector; State interventions on best practice on provision o f BDS, MF weakens market-based approach to services and opportunities to communicate implementation and financial successes, continuing constraints to development intermediation to MSMEs of MSMEs, and recommendations on relevant policy changes. Letter o f Sector Policy and close dialogue will provide the framework and mechanism to address policies and regulations at issue inthis project. Private sector-led P M U is not supported M Selection o f the P M U will be made by by the Government and does not Government representatives and implementation implement project and monitoring performance will be supervised by the functions as agreed. private-public Review Committee. Intermediaries fail to perform in M The project will be continually learning and accordance with performance agreements. adapting as its know-how interms o f how to support providers intarget markets inNigeria grows. This growing "market" expertise will be usedto adapt performance arrangements to strengthen performance o f intermediaries, re-direct support to new services and screen out services that do not provide the impact at the level o f the M S M E that is being sought. Insufficient knowledge and experience H Experienced procurement consultant will be with IDA'Sprocurement procedures will hired for six months to assist NIPC manage the cause substantial delays inproject procurement functions prior to engagement o f implementation and increase risk o f the PMU. The project will focus on training of mis-procurement all procurement staff and a comprehensive chapter o f the Project Implementation Manual on procurement will clearly define procurement procedures applicable to the project. Inaddition! intensive procurement supervision and review oi the first contract for each type o fprocurement by the Executing Agency regardless o f the threshold will help the agency to comply with - 29 - procurement guidelines ina timely manner. Project financial management risk M Adequate supervision by Bank FMS, and external audit Overall Risk Rating M 3. Possible ControversialAspects: None. G. Main Loan Conditions 1, Effectiveness Condition a P M U selected and hired and procurement and financial management assessments o f such firm's capacities are satisfactory. FullProject ImplementationManual, includingprocedures for the grant components o fthe project and final procurement and disbursement plans for the first implementation year, agreed between NIPC/PMU/IDA, and NIPC has established acceptable financial management systems. Release by the Government o f the allocation of counterpart funds for the first implementation year. 2. Other [classify according to covenant types used in the Legal Agreements.] H. Readiness for Implementation 0 1.a) Theengineeringdesigndocuments for thefirst year'sactivities arecompleteandreadyforthe start o f project implementation. IXI 1. b) Not applicable. ixI2. Theprocurement documents for the first year's activities are complete andready for the start of project implementation. ixI 3. The Project Implementation Planhasbeenappraised and found to be realistic and of satisfactory quality. 04. Thefollowing itemsarelackingandarediscussedunderloanconditions(SectionG): - 30 - I, Compliancewith Bank Policies 1, Thisprojectcomplies withall applicableBankpolicies. 02.ThefollowingexceptionstoBank?licks arerecommendedforapproval. Theprojectcomplieswith all other applicable Bankpolicies. -31 - Annex 1: Project Design Summary NIGERIA: Micro, Small and Medium Enterprise Project KeyIndicators Performance Data CollectionStrategy Hierarchyof Objectives Critical Assumptions Sector-relatedCAS Goal: Sector Indicators: Sector1country reports: (from Goal to Bank Mission) 4ccelerate reduction o f Annual GDP growth in National Statistics; State Political stability and ioverty by promoting participating States level surveys and periodic commitment o f newly )road-based economic I C A updates; Project elected government to indprivate-sector led Increased contribution to Impact Assessment private sector; economic ;rowth in the non-oil GDP growth by sectors Framework and M&E and financial reform irivate sector assisted by the project system agenda; and reduction o f rent-seeking behavior Jroject Development Outcome / Impact IProjectreports: (from Objectiveto Goal) lbjective: Indicators: .ncrease the performance Growth o f MSMEs' Project Impact BDS and financial indemployment levels o f value-added in Assessment Framework products and services MSMEs inselected participating States and and M&E system; project responsive to MSMEs' ion-oil industry sectors supervision and progress needs; Government i s ;ub-sectors and inpilot reports committed to improving ireas o f the country the investment climate and lowering rent-seeking behavior lutput from each Output Indicators: IProject reports: (from Outputs to Objective) :omponent: ;inancia1 institutions $15 million new private Project Impact Financial institutions and ncrease their lending to sector investments in Assessment Framework Government maintain vISMEs microfinance institutions and M&E system; project their commitment to a (MFIs); at least two supervision and progress private-sector led, MFIs; three commercial reports market-driven, banks establish M S M E commercial approach to downscaling programs; financial institutions portfolio at risk (arrears development; MSMEs' over 60 days) not greater capacity to utilize than 5 percent after financial services second year o f operation increases as they become for both MFIs and more competitive inthe - 32 - commercial banks; loan lomestic and/or global portfolio cumulative narket disbursedof $75 million each for MFIs and commercial banks Nigerian firms At least 1,000 MSMEs .ditto- ;inns' operational competitively respond to are supplied with BDS by itrategies reflect lessons increasing demand for participating BDS earned from TA products and services providers; up to 4,000 eceived; firms new (including indirect) ncreasingly utilize jobs in3-5 supply chains ivailable technical, inselected industries wsiness and financial ,ervices BDS providers provide Under both the BDS .ditto - dSMEs respond firm-oriented, relevant Fundand industrysupply avorably to TA received services chain, at least 20 BDS md positively rate providers assisted by the iervices from BDS Fund; at least 75 percent roviders cost recovery reached by participating BDS providers within a specified time-frame; at leat 20 products or services with sustained uptake improved or developed through support from the Fund Reduction in constraints Secured transactions . ditto - 3overnment participates faced by businessin regime introduced in each npreparation, selected areas of target State; regulatory dentification o f required investment climate, framework updated for :hanges and follows including initially: leasing industry; hrough on commitment secured transactions, framework for credit o changes inrelevant leasing, credit bureau, m e a u established; ireas o f the investment commercial dispute dternative dispute :limate resolution :esolution mechanisms ieveloped and .mplemented inup to :hree States Business entry facilitated Streamlined procedures; Iditto - lialogue with private by public institutions ntegrated tax and iector should strengthen - 33 - ncluding Corporate m i n e s s registration inderstanding and Iffairs Commission, irocesses; reduction in :ommitmentto 7ederal Inland Revenue ransaction costs for mplement reforms that service :ompany registration mprove the investment with CAC (including a Aimate and lower .eduction in the number ent-seeking behavior ifsteps requiredto .egister a business from 9 o 6 and reduction intime *equiredby 30 percent) 'ublic sector agencies 2t least 3 M S M E ' ditto - igencies follow through )erformance to deliver on :ompetitiveness )ntheir commitment to heir M S M E mandates :onferences held (annual) he project component ire strengthened mdreports o f indbest practice iroceedings produced ninciples andphilosophy inddisseminated; lnderlying this issociated roundtable :omponent. iiscussions held between 3overnment and private iector to disseminate essons, best practices, uccess stories from the iroject and establish iialogue to improve iolicies and programs argeted at MSMEs 'roject impact ippropriate monitoring . ditto- 'articipating institutions, issessment carried out mdevaluation system tgencies, private sector stablished to measure willing and able to he project's impact in irovide relevant iarticipating States nformation 'roject Components I nputs: (budget for each 'roject reports: from Componentsto iub-components: :omponent) htputs) iccess to Finance: IrS$ 33 million dicrofinance/ ?regress, supervision, nstitutions or iommercial nid-term, completion nechanisms are ,anking/leasing/credit -eportsprovide feedback :stablished on a timely bureau incompliancewith terms iasis; services meet ifreference, established vISME requirements, and Consultants ierformance targets and :lients pay for services Grants leliverables; evaluation xomptly; legal and eeport documents impact .egulatory environment i s issessment. :onducive to the - 34 - ievelopment o f the aechanisms BusinessDevelopment US$ 16 million Services: 1. Training and Advisory JS$6.5 million 'ditto - [nstitutions or Services for BDS mechanisms are Providers :stablished on a timely Consultants basis; services meet Grants MSME requirements, and :lients pay for services 2. BDSFund JS$9.5 million . ditto - -promptly ditto - Consultants Grants [nvestmentClimate: US$5.8 million 1, Registration Reform JS$1.6 million .ditto - Government implements Consultants reforms that improve the Training company registration Equipment system 2. Commercial Dispute US$2.2 million .ditto - Government Resolution demonstrates its Consultants commitment to establish, Training implement dispute Equipment resolutionmechanisms, lower rent-seeking behavior 3. Leasing Services JSS0.5 million - ditto - Leasing regulations Consultants conducive to increasing services; participating leasing companies apply learnedtechnology 4. Credit Bureau JSS0.5 million .ditto - Client and participating Consultants institutions provide quality information- 5. Secured Transaction JS$1million -ditto- New mechanisms adopted PubWPrivateSector LJS$1.1million .ditto - Government/ private Partnership sector demonstrate Development confidence inpartnership Zonsultants development efforts; Training Government open to -35- Equipment adopting best practices in their programs Project Management, US$2.5million - ditto - Private sector-led PMU Monitoringand receives government Evaluation support and implements Consultants project and monitoring Training function as agreed. Equipment Recurrent expenditure Unallocated US$1.6million Total US$60million -36- Annex 2: Detailed Project Description NIGERIA: Micro, Small and Medium Enterprise Project By Component: Project Component 1 Access to Finance Component US$33.00 million - - Objective: The objective o f the Access to Finance component i s to increase access and availability o f financial services to MSMEs through the introduction o f new financial institutions, products and tools, re-enforcedwith selective financial sector legal and regulatory reforms being undertaken under component 4 (Investment Climate). Background: The Nigerian financial system i s one o f the largest in sub-Saharan Africa consisting o f a diverse array o f banking and non-banking financial institutions, including as o f end-2001 89 commercial and merchant banks, over 1,000 rural-oriented community banks, 7 development finance institutions, 229 licensed finance companies, about 195 primary mortgage institutions, over 100 insurance companies, 5 discount houses, various pension schemes, and over 100 exchange bureaus. There are also embryonic money and capital markets. This apparent diversified nature o f the system i s deceptive, however, as commercial banks overwhelmingly dominate the financial sector (accounting for 93 percent o f non-centralbank assets), traditional bank deposits represent the major forms o f financial savings, and inthe absence o f a variety o f products and services, access to term finance by the real sector i s very difficult at best. Development finance institutions, traditionally the major source o f long-term debt capital for the real sector, were increasingly marginalized as their financial status declined by the late 1990s. Their combined annual loss amountedto about Naira 2.1 billion or 8.6 percent o f average total assets; the combined total assets o f four institutions declined almost 17 percent innominal terms intheir most recent reportingyear; and four o fthe seven institutions virtually didnot have any disbursements in 1998. While these institutions represented a small part o f the financial sector they discouraged more efficient commercial banks from entering the long-term finance arena. The performance o f community banks and rural commercial banks in extending financial services has been disappointing also. By the late 1990s, only about 200 o f the over 1,000 community banks were believed to be profitable. Leasing, which can also contribute significantly to M S M E medium to long-term finance requirements remains underdevelopedand accounted for only one percent o f total domestic investment in 1997. The growth o f the leasing industryhas been hampered by: (i) the lack o f a coherent body o f law to govern leasingtransactions; (ii) problems with contract enforcement and difficulties inrepossessing leased equipment from defaulting lessees; (iii) lack o f domestic long-term funds to finance leasing; (iv) rising costs o f equipment; and (v) lack o f awareness and the poor skills base inthe industry. Inthe micro-finance sector, in 2001 several commercial banks began micro-finance pilot projects with their own funds, however, there is little information that will allow a proper assessment o f - 37 - the results o f these pilots to date. Institutions created by the Government have not performed well; many have experienced significant losses recently as historical average loan repayment rates were low and interest rates were subsidized. About 17 major NGOs have been providing micro-finance services in Nigeria with average loan size at about US$56. These institutions tend to be operationally and financially weak, driven by social justice goals rather than financial and operational sustainability, and lack a national presence and outreach. There also are a large number o f credit unions and cooperatives. A 1991 study by the World Council o f Credit Unions (WOCCU) estimated that approximately 15,000 credit unions operated in Nigeria serving 2.7 million members with savings o f more than US$34 million financing about $37 million inloans. Neither the formal and informal financial sectors have been able to effectively support a strong expansion o f the real sector and maximize their contribution to economic growth and development. The Government has long recognized the importance of addressing access to financial services to maximize MSMEs' contribution to economic development. In 1999, an initiative instituted by the Central Bank o f Nigeria-headed Bankers' Committee, comprising the central bank and all banks as members, require all banks to set aside 10 percent o f pre-tax profits into the Small and Medium Industries Equity Investment Scheme (SMIEIS) to be used for equity investment in SMEs. SMIEIS commenced in 2001 and by around mid-2003 amounted to about Naira 14.6 billion. Approximately, Naira 4.3 billion or 29.4 percent has been invested, o f which 52 percent was invested inthe real sector (micro enterprises accounted for around 0.05 percent o f the fund and 79.3 percent the total value o f the investments was made inLagos. The Government i s committed to improving the accessibility to financial services by MSMEs and has agreed that banks should be permitted to allocate up to 10 percentof their SMIEIS contributions for investments inthe microfinance sector. Activities: This component o f the project will seek to address the shortage o f short, medium and long term finance available to MSMEs by supporting - through the provision o f performance-based grants - sustainable financial institutions and profitable lending windows within private financial institutions to expand their portfolio o f lending to MSMEs. Additionally, the project will assess the potential for the development o f private credit bureaus to strengthen the risk mitigating tools available to lenders will be investigated. Ifjustified by private sector demand and the necessary reforms are undertaken to ensure commercial potential and effectiveness, the project could support the establishment o f a private credit bureau. Similarly, with changes to the enabling environment, there i s considerable potential for growth in the leasing industry. The project would be able to provide grants to support providers o f leasing services, subject to there being the right enabling environment and providers' ability to meet the eligibility and performance requirements for this support. The grants, which will be made available to institutions satisfying the eligibility and performance criteria will help to cover technical assistance and operational costs on a cost shared basis over an initial and limitedperiod to enable the beneficiary financial institution to build up its portfolio and revenue flow sufficiently to cover operational requirements. The two initiatives most ready to move under this component are: (i) Establishment of a micro-finance company: The approach to support micro-finance takes advantage o f the opportunity presented by the interest o f Nigerian banks to set up a joint-ventures for micro-finance services based on: (1) their requirements under the SMIEIS; (2) the support o f the Central Bank o f Nigeria; (3) the existence o f market opportunities, Le., a large underserved market; (4) the availability o f proven technical expertise; and (5) the interest o f recognized international stakeholders, including ACCION, and international investment partners, such as IFC. Participating MFIs and commercial banks will be selected based on their meeting specified criteria that respect best practice and openness to support MSMEs in their corporate mission, strategic objectives and operating policies (outreach, risk assessment, credit extension, financial management, governance, social policies, etc.). (ii) Commercial bank downscaling: For commercial banks, assistance will focus on the development and implementation o f a technical skills transfer program designed primarily to introduce to selected participating banks new systems and lending methodologies for MSMEs. The technical assistance will be provided on a cost-sharing basis to banks that provide strong evidence o f a corporate commitment to extend further into the M S M E credit market by growing their M S M E loan portfolio. Project Component 2 Business Development Services US$lS.OO million - - Objective: The objective o f the BDS component o f this project i s to increase MSMEs' access to quality business services that are both specialized and well-tailored to the specific needs o f MSMEs. Targeted MSMEs are expected to improve their performance through the application o f know-how acquired through BDS providers supported by the project. Background: Business services are not available inthe quantity, quality and price ranges required by MSMEs for a number o f reasons. First, local BDS providers (which can include specialized consulting firms, formal education institutions, business membership organizations, NGOs, and firms within the supply chain) have limited capacity and few products that are appropriately tailored for MSMEs. This i s particularly the case for sector-specific technical training for which most providers tend to use off-the-shelf products that are usually created for larger, more formal businesses. Second, most local BDS providers tend to prefer working for larger firms and government or donors where contracts are larger. O n the demand side, MSMEs make little use o f business development services, inpart because they feel unable to afford such services and inpart because they lack information about them and do not trust the benefits they can derive from their use. To address these constraints, the proposed project will combine two approaches: (1) Industry-focused BDSprogram:assisting BDS providers to develop training and consulting services that can assist MSMEs within specific industries to increase their value added and grow; and (2) BDS Fund: building capacity o f providers o f value-adding services to reach larger numbers o f MSMEs with higher quality services usinga sustainable business model. The -39 - approach inboth cases will be demand-based. Demand will be assessed through market studies, firm surveys, focus groups and interviews, as well as firms' willingness to pay for services. In particular, the following principles will be followed: w Getting the rightproduct: selling a product that is affordable inthe market place, that is ... tailored for MSMEs and for the local environment. Special attention will be given to the development and adaptation o f products that meet MSMEs' needs. Keeping subsidies out of the sales transaction: ensuring that subsidies are upstream in product development and capacity buildingto provide sustainable outreach; Working with multiple suppliers to ensure that by working with a specific supplier, the project will not force another one to go out o f business; Performance GruntAgreements: BDS providers will be requiredto fulfill sustainability, outreach and impact targets as a condition o f disbursement. (1) Industry-FocusedBDS Program The Industry Supply Chain Development sub-component o f the IDA project will combine an industryfocus and a BDS development approach. The assumption is that focusing onhigh growth sectors and addressing the inefficiencies along the chain can result inhighand measurable impacts in terms o fjob creation and firm growth. The project will include up to four industries. The methodology will be consistent across industriesand will include four stages: (i) industry selection; (ii)industry analysis; (iii)feasibility work for programming; and (iv) design o f initiatives. structural/market constraints outside the scope o f the project that would prevent success. ...... The main criteria for the industry selection will be the following: highgrowth potential size o f the industry (contribution to GDP) and geographical distribution. number o f MSMEsinthe value chain and SME employment potential for local MSMEsto capture more value added evidence that financing/ TA can help MSMEs achieve the above goal, Le., there are no commitment of key industrystakeholders Those industries that rank higher interms o f growth potential and outreach will be selected to do a more in-depth industryanalysis. The analysis consists o f an industry overview and a value chain analysis. The industvy analysis provides a succinct picture o f the size o f the industry, its distribution and main players, and the sources o f competitiveness and growth potential. The value chain analysis identifies the most important segments o f the chain interms o f contribution to employment and income and evaluates the cost o f production at each stage based on international standards to detect any inefficiencies and areas where improvements can be made. Thefeasibility analysis focuses on assessing the demand for and supply o f BDS services within each segment o f the value chain. Based on the results o f this diagnostic, the project will work with the industry stakeholders to develop aprogram to support intermediaries seeking to meet MSMEs'business development needs within the supply chain. - 40 - Inorder to create a strong demonstrationeffect on which to launch this sub-component, this methodology has already been applied to agriculture and agro-processing industries. Based on the analysis, catfish farming has been selected as the first target industry. The proposed interventionsto support the catfish farming industry are presentedbelow inthe following box. Interventions in other industries (up to three additional industries are anticipated within this existing project budget) will vary according to the characteristics o f the underlying value chain and determination o f the ways inwhich BDS can improve MSMEperformance inthe value chain. -41 - CatfishIndustry Background The fishing industry i s a major and growing one inNigeria, even more so than meat (in2000 fish production grew by 22 percent while meat production grew by 6 percent). As a maritime country with large inland water resources, fishing represents a large share o f Nigeria's economy. The fishing industry i s an important source of: employment, particularly in poor rural areas; food; income; and foreign exchange eamings (approximately $57million). Local fish production i s about 500,000 tons per year, less than half o f local consumption. Invalue terms, the domestic fish industryrepresents 60 percent o f total production, o f which catfish accounts for 33 percent. The balance i s imported, making Nigeria the largest importer o f frozen fish in Africa. Although aquaculture represents a small share o f total fish consumption in Nigeria (0.4 percent), Nigeria i s the fifth aquaculture producer in the world after the US, Thailand, Indonesia, and Maylasia. Furthermore, aquaculture is the fastest growing source of domestic fish supply (almost 50 percent growth (involume) since 1995). Given the limited supplies o f caught fish and consumer's preference for fresh fish over imported frozen fish, this trend is expected to continue. By value, catfish accounts for 33 percent o f total fish production and 60 percent o f the freshwater fish industry in Nigeria. Demand exceeds supply and the best way to increase supply is through catfish aquaculture. There are three main players in the production and distribution o f farmed catfish: (i) hatcheries, where eggs are incubated, hatched, and raised to fingerlings; (ii)out-growers, which raise (or outgrow) the fingerlings/juveniles to table-size fish using different water holding systems; and (iii) traders or "fish mammies", who are organized in associations, buy from the farmers, transport and keep the catfish alive for up to a week, and sell about 30 percent o f it to roadside restaurants and retailers; few fish are also sold directly to consumers. The main constraints affecting catfish aquaculture are: (i)limited access to critical operational inputs: quality feed, which can only be imported and constitutes at least 60 percent o f the production cost; and fingerlings, which are scarcely produced due to lack o f know-how; (ii) limited access to reliable technical expertise about aquaculture; (iii) access to finance; (iv) limited highlevels o f theft o f catfish farms. With the increased access to technical support that would result from the Project and providing finance can be secured, catfish aquaculture could generate substantial revenues and new jobs (including jobs in downstream sectors such as fast-food restaurants.). Activities: The Project will focus on the following areas o f intervention: Training and ConsultingServices. The Project will: (i) provide training to local fish industry consultants and develop an accreditation system -these consultants could include input suppliers, such as feed and fingerlings suppliers-; (ii) provide business management, business planning and financial advisory training to specialized consultants; (iii) develop training courses for start-ups and deliver them through local institutions; (iv) provide specialist training to skilled small scale catfish farmers interested in developing hatcheries and to potential feed suppliers. . Aquaculture Best Practice Development, including developing an aquaculture manual tailored to the needs o f most entrepreneurs in Nigeria buildingon existing materials. Aquaculture Association Development. The goal o f the association would be to: (i)help set standards and disseminate knowledge by training consultants and sponsoring research; (ii) create a network to facilitate business opportunities and improve the distribution channels (for example by developing a mechanism for industrial customers to contact farmers through the association); and (iii) conduct advocacy. This component will focus initially on Lagos, Kaduna, and Abia, and would target bordering states where there i s a large volume of catfish production or where there are significant successful ventures interested in participating in the Project, such as Oyo state, The catfish initiative w i l l be implemented in close collaboration with FA0 and the Federal Ministry o f Agriculture, which are leading a nation-wide fisheries development project as part o f the Special Program for Food Security. The overall program will be managed by an independent, qualified firm, that will be competitively selected and charged with: (i)designing and delivering each specific activity based on an agreed-upon work program; (ii) selecting and contracting suecialists and providers as needed: and (iii) monitoring the project according to a performance contract. - 42 - 2. BusinessDevelopment Services Fund(BDSF) Background: While financing and a friendly business environment are important factors for the success o f a business venture, MSMEsoften fail or do not achieve their full potential because they lack proper organizational capacity, skills, systems and procedures, information, and technology. Improvements in these areas through training and use of consulting advice can often translate into cost savings and efficiency gains. According to a firm survey conducted in Eastern Nigeria to assess MSMEs' demand for such services, MSMEsconsider human resource management, marketing, and accounting as the most important areas of concern for their businesses. Specialized advice inthese areas i s either lacking, not well-tailored to their needs, or too costly. The BDS Fund (BDSF) will aim to buildthe capacity o f BDS providers to supply highquality services to MSMEs operating inLagos, Kaduna, and Abia states. The project will promote the development of three to six specific services for which there i s a clear excess demand among the target population o f MSMEs. These services will be identified through a BDS demand survey and consultations with business communities in the target States. The range o f potential services considered is broad and includes information, training, consulting, advisory, export marketing, information technology, design, and product development. Based on preliminary analysis, human resource management (including recruitment, human resource policy, staff training and incentive systems), marketing, and accounting, seem to be some o f the services for which there is a potential untapped market. Activities: Grants will be extended to business service providers selected based on criteria that reflect best business practices. Applicants will be carefully screened to ensure that recipients have the requisite management capacity, financial strength, sound business model, and commitment to serving MSMEs. Firmswill have to be operating as business and have a strong track record o f performance intheir core business lines; demonstrated management capability; audited financial statements; experience with and significant interest in serving MSMEs;willingness to take a commercial approach to service provision; and ifnot a private business, a significant and growing ratio o f fee revenues to operating costs. Winningproposals will be those that contain measurable targets interms o f reaching large numbers o f MSMEs (outreach) with services that make a difference (impact) and that can be delivered on a sustained basis (sustainability). Project Component 3 Investment Climate US$ 5.80 million - - Objective: The objective o f this component i s to reduce the constraints firms face inregistering their businesses and enhance firms' confidence in entering a contractual agreement. The component will focus on a number o f specific investment climate constraints related to business registration, commercial dispute resolution and legal and regulatory changes related to the leasing - 43 - industry,the establishment o f a commercial credit bureau and the introductiono f a secured transactions regime. Background: (i)Business registration: Companiesintheinformal sector preferto stay inthe informaleconomy or rely on informal mechanisms as they perceive that benefits o f staying informal outweighs the costs o f going formal. Benefits o f being inthe informal sector are mainly avoidance o f taxes and burdensome government regulations. Red tape basically imposes additional costs such as bribes and indirect costs such as investors' time spent on complying with the red tape. There are also costs to staying inthe informal sector. As seen inNigeria, companies need to stay small in order to remain under the radar to prevent harassment by authorities/inspectors. In some cases, even formal companies prefer staying under the radar as much as possible. While the necessary bribes may be costly, they are lower than the taxes, fees, social security, and other official payments confronting firms. However, this strategy is risky. Failure to pay the bribes can result in heightened harassment and closure by aggressive bureaucrats/inspectors. When firms are informal, they do not have the tools to complain against such harassment. Another cost o f being informal i s the lack o f a social security net for the firm owners and the employees, increasing the uncertainty. Finally, companies inthe informal sector do not have access to credit channels and different types o f SME assistance services such as business development services - the main two services this project aims to provide to MSMEs inNigeria. Within this framework, a more streamlined registrationprocess can be expected to encourage more businesses to migrate into the formal sector. At the firm level, formalization would improve access to financial and non-financial services as well as reduction inwaiting times and economic costs (explicit and implicit). Another benefito f improving business registration i s the additional revenue from company tax. Inthis regard, there i s often a trade o f f between improved access to the registration process and higher tax revenue. While better registration processes both for businessas well as tax registration allows firms to migrate to the formal sector, there is often a general disincentive from making this migration as it exposes smaller and less structured firms to regulatory agencies. (io Commercial Dispute Resolution: The ability to enforce contract i s fundamental for businesses to enter into long term relationships with other customers. Manufacturing firms surveyed in 2000 (WED) noted that inefficient courts procedures coupled with administrative bottleneck in the judicial system cause delays in the resolution o f commercial cases. Currently, "Doing Business" estimates that it takes 730 days for a business to settle disputes. As a result o f businesses are reluctant to enter into arms' lengthtransactions in order to avoid potential contract disputes. The net effect i s that business costs are increased. A more effective system for resolving commercial disputes would increase business confidence and decrease costs. Untilconfidence incourt processes has beenrestored, alternative dispute resolution outside the formal judicial process can be used for resolving commercial disputes. The intemational experience suggests that in a significant share o f cases ADR represents a better way to resolve a dispute for all parties involved. One finding inall studies o fcourt-annexed ADR programs, is that - 44 - litigants like ADR. They report much higher levels o f satisfaction with a dispute resolved through ADR than with a trial or an unmediated settlement. Nigeria's laws are conducive to ADR. Domestic arbitration i s governed by the Arbitration and Conciliation Act (Cap 19 Laws o f the Federationo f Nigeria 1990), which i s modeled on the UNCommission on International Trade Law (a model law which contains internationally accepted provisions for the conduct and regulation o f arbitration.). Cap 19 implements the 1958 New York Convention on Recognition and Enforcement o f Foreign Arbitral Awards, which provides for the recognition and enforcement o f arbitral awards in another party's jurisdiction. There i s also a court-annexed ADR program for negotiation and conflict management, the Lagos MultiDoor Program, which has recently been instituted. The Nigeria branch o f the Chartered Institute for Arbitrators holds training and specialized courses for lawyers and non lawyers. However, inNigeria the use o f alternatives to litigation such as mediation, conciliation and arbitration has not been fully exploited. InNigeria ADR is underdeveloped. (iii) Secured TransactionsRegime: Resources will be allocated to strengthen the collateral process (access and enforcement) through a Secured Transaction System. Support will be extended to develop a legal regime which provides easy and efficient procedures for resolving priority disputes and, incase o f default under the financing agreement, enforcement o f rights against collateral that can proceed through a private contractual arrangement without recourse to the justice system and, as an alternative, through an expeditious summary court proceedings. Fundingwould also be made available for a hardware and software system that could be usedfor the establishment o fpledge registries o fmoveable capital. (iv) Leasing Industry; Under this component, the project will focus on pursuingthe development o f appropriate policies and changes inthe legal and regulatory framework supporting the leasing industry. The focus will be on reforming the tax regulations for leases; working with the Nigerian Accounting Standards Board (NASB) on the adoption of International Accounting Standards in lease recognition policies; coordinating with policy makers and financial regulators to ensure that best practices are followed in licensing leasing activities, regulating capitalizationand other prudential requirements to protect the financial system and the leasing industry; and support the legal system inhandling leasing cases. (v) Credit Bureau: While a credit riskmanagement system (CRMS) exists inthe Central Bank o f Nigeria (CBN), there has been limited demand for the service. The potential exists for a private sector Credit Bureau to enter the market, working inpartnership with the CBN in order to put in place a mechanism that does effectively serve commercial banks. The results of a recently completed IFC study into the feasibility o f establishing a private sector credit bureau will be used as the basis for identifying possible changes to be made inrelated legal and regulatory climate pertaining to mandatory provision o f (negative and positive) data to the bureau and access to certain public data bases, e.g., national population and IDregisters, registrar o f companies, property and deeds. Consideration will also need to be given to the approval o f a Bureau Code o f Conduct which, inthe absence o f specific consumer protection legislation, will be essential to ensure internationalbest practice standards are introduced and maintained. - 45 - Activities: (i)BusinessRegistration A FIAS/USAID Study (Investors Roadmap) that examined administrative procedures to invest in Nigeria suggests that the legislation underlying the incorporation process i s o f good quality and generally in line with international practice. However, there are a number o f areas where improvements could be made that would ease the burden on MSMEs. The Business registration component o f the project aims to address these issues by developing close cooperation between registration process and company outreach - based on international best practices (for example, the C A C and the Federal Inland Revenue Service (FIRS) and : (a) streamline o f the business the Business Services in Canada); (b) assist the CAC's Computerization program; (c) expand the Computerization system to the two pilot states (CAC's Zonal Offices) and improve company access; (d) integrate the stamp Duty Payment, tax and VAT and foreign direct investment registration procedures into the company registration process. (a) Streamlining the CACprocedures The C A C i s making strides to increase its efficiency, particularly through the ongoing computerization program within headquarters and inthe liaison offices. It i s critical to streamline the internal CAC process inparallelwith computerization of the system to increase the effectiveness o f the computer application and reach effective results. The streamlining process would be based on learning opportunities for the C A C staff o f best practices, aiming to reduce the number o f days to process applications to the target o f 24 hours envisioned by President Obasanjo. The simplification o f the registrationprocess could involve the following steps: k Enhance the capability o f CAC personnel through workshops conducted by best practice experts, and possibly exchange programs and twining arrangements Usingbest practice indicators, the project could assist the C A C to further strengthen the efficiency o f its registration process. This exercise would also involve a comprehensive analysis o f the process and the instruments (forms) used in each step by the best practice experts to identify possible alternative procedures to streamline the overall registrationprocess within the CAC. k The outcome o f this activity would be a standardized operating manual which indicates the targeted time and cost associated with each step. (b) Assistanceto the CAC's Computerization program The CAC computerizationprocess, which i s going to cost about US$6 million or N800 million, is currently ongoing. Within this process, the name checkiavailability database has mostly been completed, allowing computerized searches and completion o f the process in one business day, unless it i s conducted inthe zonal offices and needs additional verification at the Abuja office. - 46 - The information technology (IT) company contracted by C A C to computerize its operations suggested that the computer applications would handle document management, business registration, web interface, management reports, and Smart Card technology for payments. The equipment required to widen the system to the initial set o f zonal offices i s expected to arrive in about 6 weeks. The IT company also noted that there i s no law in Nigeria on electronic signature so the stamp duty document and the applicants signature will have to be scanned as part o f the on-line registration process and sent to C A C via post. Inthis perspective, there are two areas the MSMEproject would assist CAC's computerization process. (i) A study o fthe current computerizationat CAC, including an analysis o f the software beingused, and determine additional support neededto increase productivity and the alternative financing o f this activity. This would involve (i) integration o f streamlined procedures under component A described above; (ii) develop and implement a more comprehensive computerization o f CAC headquarters and the zonal offices at the pilot states, taking into consideration best practices, infrastructure needs, and sustainability concems. (c) Firm access to registration,and company outreach in the pilot States The MSMEproject will involve states that choose to opt-in to join the project. There i s a likelihood that C A C already has zonal offices located inthese pilot States. To increase firm access to registration, C A C also welcomes the idea o f BMO's acting as links to the enterprises. It was further agreed that the private sector must be educated on CAC operations as this would enable them to better understand the intemal process and the requirements. There i s therefore the need to organize capacity buildingactivities to achieve this purpose. This goal can be served by through the use o f other reputable avenues to deliver CAC services, strengthening o f C A C liaison offices and their link to the central office as well as the proper implementation o f on-line registration. Inaddition, on-line registration would greatly increase the ability o f enterprises to register. However, given the lack o f access o f a large percentage o f the Nigerian population to internet access, there i s the serious need to determine the most feasible way o f delivering this service. We expect that activities that reach out to the private sector would include the following: (i) relationshipwiththebusinessmembershipassociationsespeciallythoselocatedoutside Forging o f Lagos and Abuja. Furthermore, the business membership association can provide a feedback mechanism for improving C A C services and serve as a conduit through which to increase enterprise familiarity with and trust towards the CAC; (ii)Developing outreach programs such as workshops, round tables and seminars with the organized private sector and other sectoral groups; (iii)Facilitating the development o f the necessary infrastructure in some business membership associations to enable them to access the on-line registration process; (iv) Enabling the business membership associations and banks inverifying and filing CAC applications/forms and accepting CAC fees, respectively. This could eliminate the requirement o f - 47 - going to a court to notarize documents as certified notary public located inbusiness associations and banks (with SME units)can assist enterprises in this process. (d) Integration of CAC, FIRS and NIPC registration procedures There are two other areas, where cooperationbetween the CAC, FIRS and NIPC would significantly improve the registration experience o f firms: paying o f stamp duties t a x N A T registration and Foreign Investment Registration. One o f the pre-conditions o f C A C Registrationi s the payment o f the stamp duty at the Federal Inland Revenue Service (FIRS). This process takes 2-5 days depending on the method o f payment. There are opportunities to streamline the overall registration process by integrating the stamp duty payment into the C A C registrationprocess or providing opportunities for payment o f stamp duty at the banks located in CAC offices. C A C and FIRS have already met and discussed the possibility o f locating FIRS officers within the C A C offices to integrate the two procedures. A solution for this option has not been agreed on yet. Giventhe fact that C A C and the FIRS are both very open to further streamlining and continuedreforms, there are possibilities to continue the dialogue and integrate these procedures. Once they complete the registration process at the CAC, companies have to complete their tax and VAT registration with the FIRS to receive their tax and VAT identification numbers. Further exploration i s required into the possibilities o f C A C issuing the tax and VAT registrationnumbers for all companies registering at the CAC. The numbers would be communicated to the FIRS on the forms C A C currently send to the FIRS once a company completes C A C registration. Discussions are also to take place to determine whether it is possible to integrate the C A C and NIPC registration processes and establish the necessary protocols to enable sharing o f data bases, inline with the mandated and legislatedresponsibilities ofthe two Agencies. (ii) CommercialDispute Resolution Subject to the results o f an in-depthassessment to be undertakenby the Government in collaboration with stakeholders, this dispute resolution component could support alternative dispute resolution inthe pilot states. A number o f states inthe country have developed ADR mechanisms that are part o f the state Ministry o f Justice such as the Lagos Multi-Door and the Kaduna ADR Center. While these efforts have reducedthe caseload inthe formal courts, they often represent another step inthe process. The objective o f this sub-component i s to increase the utilization o f private ADR systems operated by non-government institutions such as the Bar Association. The component could also buildon ongoingjudicial reform programs inKaduna and Lagos States to improve the ability o f courts inthose jurisdictions to uniformly and predictably apply the law to commercial disputes brought before them and to support the enforcement o f arbitral awards, Specific activities are anticipated to include: Skill transfer and capacity building to local trainers inADR Communications component which will include working through existing business organizations, as well as reaching out to the other segments o f the micro, small and business - 48 - community that are not part o f existing networks. This program will seek to familiarize these segments o f the business community on the potential for and benefits o f ADR. The Nigerian Bar Association, the ManufacturersAssociation o f Nigeria, the Nigerian Economic Summit Group, and the Chartered Institute of Bankers o f Nigeria have indicated their interest in establishing Court Watch Programs. Discrete initiatives that can serve to reduce the bottlenecks to dispute resolution for MSMEs inthe existing courts. Initiatives supported under this project will be buildingon an existing participatory sector-wide approach being pursued in Lagos and Kaduna States with the support o f other donors. It i s critical, in line with ongoing programs, to build a consensus for a clearly sequenced initiatives in support o f a more streamlined approach to commercial dispute resolution. Success will depend upon remedial solutions tailored to the Nigerian culture. Their implementation must reflect an understanding o f how much change the legal profession can accept, and include a clear articulation to those concerned o f the benefits to them o fjudicial reform. Ifthere i s support for incremental change, a virtuous cycle can be initiatedby systematically reducing the opportunities for rent seeking behaviors, and changing attitudes among the judiciary, the bar, and court users. (iii) Secured Transactions Regime The focus o f the Secured Transaction System Sub-component will be on strengthening the collateral process (access and enforcement). Support will be extended to develop a legal regime which contemplates easy and efficient procedures for the creation, registration as the basis for resolving priority disputes and, incase o f default under the financing agreement, enforcement o f rightsagainst collateral that can proceedthrough a private contractual arrangement without recourse to the justice system and as an alternative through an expeditious summary court proceedings. The design criteria for the secured transactions system would take the following factors into account: (i) protect the rights o f the financial institutions and creditors, inparticular, lenders, leasing companies, public institutions with claims on movables; (ii) expedite the extension o f credit on more favorable terms and costs; (iii) while maintaining recourse to the court enforcement procedure, the system should allow financial institutions to foreclose on the collateral incase o f default without requiring creditor or permitting debtor recourse to thejudicial system or government security personnel; (iv) identify an alternative procedure to lengthily court proceedings o f issuingexecution orders and determine priority disputes; (v) identify an efficient registration procedure, and potential institution to serve as the central registry; (vi) propose mechanisms to increase financial and operational sustainable o f the system; and (vii) the need to have a simple and efficient legislation to support the system. It is envisaged that the design o f the secured transaction system would also incorporate the need o f credit grantors to learn about interests o f non-lending institutions such as leasing companies, retail seller o f goods under conditional sale agreements and any other transactions which may effect the real value o f the property they deal with. Fundingwould also be made available for a hardware and software system that could be used for registration o f the financing statements. A - 49 - training and capacity buildingprogram to ensure that the opportunities and implications o f the reforms are fully understood and implementedby relevant stakeholders including tax authorities, commercial lawyers, judges and relevant agencies o f Government. (iv) Leasing On the basis o f the results o f the leasing sector assessment commissionedby the IFC, consultations now need to be launchedwith the key players inthe public and private sectors to address the outstanding "enabling environment" issues. This dialogue, which i s to result inan Action Plan that can be supported through technical assistance and capacity buildingfinanced out . of the IDA credit, will encompass: possible amendments to the Companies Income Tax Act, the Bankruptcy Act and the Statement on Accounting Standard (SAS); mechanisms; ...... introduction o f a leasing law and repeal o f the current Hire Purchase Act; creation o f separate guidelines for leasing companies (versus finance companies); review o f prudential norms as they apply to leasing; adaptation o f the SMIEIS program to make it possible for these funds to be made available for investment inleasing companies; investigation o f ways to secure moveable collateral and establish a viable credit bureau; enforcement o f contract right repossessionvia courts or alternative resolution education and outreach programs and activities with the leasing industryand its associations, the financial sector, the judiciary and government agencies with supervisory and policy responsibilities affecting the leasing industry. (v) Credit Bureau Based on consultations with stakeholders and authorities and agreements reached out o f these . discussions, project resources could be utilized for: legal and regulatory reforms for facilitate data sharing in conjunction with the Central Bank, the Commercial Affairs Corporation, the FederalInland Revenue Service; . legislation inrespect o f consumer and data protection issues and a related credit bureau code o f conduct; .. training and capacity buildingrelated to credit bureau licensing and supervision issues; outreach and training programs to educate both businesses and lenders on the merits o f credit bureau services. - 50 - Project Component 4 PubliclPrivate Sector Partnership Development - - - US$1.10 million Background: This component will seek to address the MSME sector issues by focusing on government agencies and their programs. Specifically, capacity buildingbased on lessons learned and best practices stemming from international microfinance and business development services will be extended to relevant government agencies targeted at M S M E development. Advisory services would be available to update government policies and review, re-engineer, and build on ongoing government- sponsored programs aimed at MSMEs to enhance their responsiveness to MSMEs and increase the sustainability o f program results that are founded on best practices. Activities: Resources will be allocated also to facilitate the dialogue process between the public and private sectors. This will include the Small and Medium Scale Enterprises Development Agency o f Nigeria (SMEDAN) and the Nigerian Investment Promotion Commission (NIPC). SMEDAN would take the lead on a dialogue with business associations, private sector and government stakeholders with a view to preparing M S M E competitiveness report on an annual basis utilizing the cost o f doing business surveys and other evaluations generated by the project and research undertaken by SMEDAN itself. This component will also support other leaming agenda events (domestic and through study tours) including best practice workshops with leading Africa and international practitioners that will feed into topics and priorities to be addressed inthe Annual M S M E Competitiveness report. Support will also be provided to participating States with policy and public-private dialogue responsibilitieswith the M S M E sector to assist them develop expertise inbest practices in these areas. Project Component 5 Project Management, Monitoring and Evaluation US$2.50 million - - To facilitate the implementation o f this project, resources allocated to this component will fund financial, audit, training, and consultant assignments required to prepare an implementation manual and further the execution, reporting, review (semi-annual and mid-term), and monitoring o fproject components. Provisions will also be made for equipment and operational costs (within an agreed framework). A comprehensive impact assessment survey will also be conducted. This assessment will quantify and benchmark constraints, based on the implementation o f State-level enterprise surveys. These surveys would provide baseline data on enterprise productivity and the cost o f doing business. -51 - Annex 3: Estimated Project Costs NIGERIA: Micro, Small and Medium Enterprise Project Local Foreign Total Project Cost By Component US $million US $million US $million Access to Finance 22.50 10.50 33.00 BusinessDevelopinent Services 9.70 6.30 16.00 Investment Climate 2.70 3.10 5.80 PrivatePublic Sector Partnership Development 1.oo 0.10 1.10 Project Management, Monitoring, and Evaluation 1.oo 1.50 2.50 Unallocated 0.00 1.60 1.60 Total Baseline Cost 36.90 23.10 60.00 Physical Contingencies 0.00 0.00 0.00 Price Contingencies 0.00 0.00 Total Project CostsI 36.90 23.10 60.00 Total Financing Required 36.90 23.10 60.00 Local Foreign Total Project Cost By Category US $million US $million US $million Goods 0.00 1.80 1.80 Works 0.00 0.00 0.00 Services 27.00 12.60 39.60 Training 0.80 2.00 2.80 Operating Costs 0.30 0.30 0.60 Grant 7.90 5.10 13.00 PPF Refinancing 0.40 0.20 0.60 Unallocated 0.50 1.10 1.60 23.10 60.00 , I Total Project Costs 36.90 Total Financing Required 36.90 23.10 60.00 - 52 - Annex 4: Cost Benefit Analysis Summary NIGERIA: Micro, Small and Medium Enterprise Project [For projects with benefitsthat are measured in monetaryterms] PresentValue of Flows Fiscal Impact ~conomic Analysis FinancialAnalysis` Taxes Subsidies Benefits: 70.7 14.3 NIA (US$ million) costs: 35.1 NIA (US$ million) Net Benefits: 35.6 14.3 NIA US$ million) IRR: 26.2 (percent) Note: The discount rate used for the economic analysis i s 12percent. `Ifthe difference betweenthe present value offinancial andeconomic flows is large and cannot be explainedby taxes and subsidies, a brief explanation o f the difference i s warranted, e.g. "The value o f financial benefits i s less than that o f economic benefits because o f controls on electricity tariffs." Summary of Benefits and Costs: Base Case Results The cost-benefits analysis o f this pilot MSME project presents some limits not only due to its innovative nature in Sub-Sahara Africa but also to the lack o f data on the MSME sector. The difficulty in quantifying the economic benefits results mainly from the indirect relationship between the technical assistance, which represents a large part o f the project, and the stream o f benefits; and from the lagged effects o f the project. Nevertheless, a cost-benefit analysis has been carried out to calculate the Net Present Value (NPV) and Economic Rate o f Return (ERR) in a "with" and "without" project framework. The numeraire used in the objective function is output, which is expected to grow mainly as the result o f (i)improved capacity utilization and efficiency o f the supported MSMEs; (ii)greater access to finance for productive activities, and (iii) streamlined investment climate. After running a simple model calibrated using available data and based on conservative assumptions, the project generates a net present value estimated at about US$35.6 million corresponding to an internal economic rate o f return o f 26.2 percent. The project i s expected to have a positive impact on employment as a result o f acceleration o f output growth in the pilot areas where a minimum o f 4770 jobs are expected to be created by supported MSMEs (it i s important to emphasize that the acceleration o fjob-generating investment would be slacked by the relatively low capacity utilization rate). Inother terms, 1permanentjob i s created by the MSMEs for each $2304 granted to BDS providers. Although the size o f the multiplier effect i s not known, it should be noted that indirect jobs are also expected. Ceteris paribus, the government fiscal - 53 - position i s also positively affected. Indeed, the project would generate $14.3 million as the result o f incremental taxes paid by employees, corporate income taxes, taxes on incremental wages and registrations fees generated by the CAC. The informal sector will also benefit from the project to an extent which obviously cannot be rigorously estimated. The project i s expected to encourage informal MSMEs to crowd in the formal sector which will have a positive impact on the fiscal position. Knowledge spillovers will also positively contribute to the economy o f the pilot areas. The cost-benefit analysis was done for three main componenets: (i) BDS, which factor in some elements o f the microfinance and commercial bank downscaling sub-components, (ii) Access to finance; and (iii) Investment Climate, which, for the purpose o f the analysis, includes the components "public/private partnership", project management and unallocated. For the three categories, as shown intable 1below, the ERRSare greater than the discount rate o f 12percent, indicating that the project i s robust. The relatively highERR for the BDS component can partly be explained by the fact that the greater access to finance for MSMEs benefiting from improved BDS has been factored into calculate the benefit. This can be considered as a strength o f this pilot stand-alone M S M E project aimed at improving both BDS and access to finance. Table 1: Results by Components I BDS IAccess to Investme Overall Finance 1 & Proiect I Climate (a) NPV (US$ million) 27.3 4.7 3.6 35.6 I ERR(oercent) I 29.0 1 24.3 I 19.5 I 26.2 1 (a) The overall ERR is weighed by the relative size o f each component. MainAssumptions: 1.BDS and financial products and services are responsive to MSMEs' needs. 2. A minimum o f 220 BDS providers are expected to benefit from the grant scheme with and average amount of $50,000 per provider. Each BDS will support on average 150 MSMEs. It i s assumed that the supported MSMEs, would increase their capacity utilization rate and their efficiency which would yield an increase inoutputs at a multiple o f 5 times the amount o f support. This conservative assumption i s made based on empirical evidence from schemes in East Asian countries, where output increased at a multiple o f 15 times the matching grant amount; and in Uganda, where output increased at a multiple o f 10 times the amount o f support (BUDS-Business Uganda Development Scheme component o f the Private Sector Competitiveness project closed in December 2002). The conservative multiplying factor take into account the fact that the grant scheme will not directly support the MSMEs but the B D S providers. However, the MSMEs will directly benefit from the greater access to finance facilitated by the project. 3. For the supported MSMEs, the rate of job creation has been calculated taking into account a shadow yearly worth o f output per worker o f US $2742 given an informal sector representing 70 percent o f the economy. The rate o fjob creation has been discounted by one-half because o f the - 54 - current relatively low average capacity utilization rate o f 52 percent. 4. The additional output created by assisted firms i s defined as the difference between the level o f output achieved by firms assisted by the project and the level o f output these same firms would have achieved without the project. Without the project, based on experience from the Uganda BUDS scheme, it i s assumed that only 50 percent o f the MSMEs will undertake the activity supported by the BDS providers, but with a delay o f 3 years. 5. The transfer o f knowledge/skills will have a lasting effect on the activities o f the beneficiaries and this, up to seven years after project completion. 6. It i s assumed that there i s no mismanagement of grant receivedby BDS providers and financial institutions. 7. In the base case, the increase in firms' output i s discounted by two-third to take into account the social costs o f other resources in the economy that are diverted into the project from other activities not directly supported by the project. 8. It i s assumed that the support provided to improve the investment climate would, with an average lag o f two years, have a positive impact estimated at 2 times the amount o f support. 9. A stable macroeconomic environment with price and exchange rate stability i s also assumed. 10. For the investment climate and the public/private partnership components, it i s assumed that financial cost and benefits equated economic cost and benefits. Sensitivity analysis / Switchingvalues of critical items: Four sensitivity tests were carried out by switching values o f critical variables. The results are presented in table 2 below. (i) first test decreases the socialcost ofresourcesdivertedinto theproject from 66 The percent to 50 percent; the NPV jumped to US$102.5 million with a corresponding ERR o f 43.3 percent. 5015 jobs are created. (ii)Thesecondtestassumes a75percentsocialcostofresourcesdivertedintotheproject, the N P V considerably decreased to US$7.4 million while the ERR dropped to 15.6 percent. About 2500 jobs are generated. (iii) thirdtestassumesahigherincreaseinoutputforeachfirmfrom5to10;theresults The showed a NPV o f US$84.3 million and ERR o f 39.3%. (iv) The fourth test elongates the disbursement period by two years, the N P V decreased to US$17.9 million while the ERR came down to 20.1%. The number o f jobs created remains the same as inthe base case with however a slightly lower rate o fjob creation. - 55 - The fiscal impact is positive inall the scenarios. Table 2 : Sensitivity Analysis Summary Scenario Sensitivity Cases Variable NPV Jobs Performed Amount ($m) (%) Impact created Overall Project Delayed Project Elongated (a) Base (a) Regular 35.6 3410 Implementation disbursement period (b) Alternate 17.9 3410 Disbursement (b) Slow Disbursement Change in Percent (a) Base (a) 66% 35.6 3410 Diversion reduction in Reduction Assumption increase in (b) Alternate 7.4 2507 output (b) 75% attributed to Reduction diversion (d) Alternate 102.5 43.3 27.7 5015 from other sources 50% Reduction Expected Increase in (a) Base (a) 5 Times 35.6 3410 Change in expected Output for each change in (b) Alternate (b) 10 Times 84.3 6820 firm output for each MSME - 56 - Benefitsfrom the project The main economic benefits and the monitoring tools are presented below: Nature of benefits / Indicators Monitoring Tools Increasedcapacity utilization rate Base case I end o f project survey (control MSMEgroup) Increasedproductivity and outputs in Base case I end o f project output levels supported MSMEs (control MSMEgroup) Increased numbero f MSMEs CAC report Job creation inthe MSMEssector rfumber o f employees at beginning I end ro.ect in therelevant MSMEs ImprovedInvestment climate; businessenvironment (Registration; E nd-of-project survey I WED follow up dispute resolution) survey Improved access to finance for New financial services and product; MSMEs survey o f relevant MSMEsI survey o f relevant financial institutions More efficient BDSmarketand ase case I end o f project survey o f services :eneficiary BDSproviders; survey of relevant MSMEs Government Taxes Tax payment by supported MSMEs; Registration fees I CAC reDort Main Beneficiaries The main beneficiaries of the project would be: (i) BDS providers, (ii) financial the the institutions, (iii) the supported MSMEswith better access to business development services, finance and improved investment climate; and (iv) the government with wider tax base and healthier fiscal position. - 57 - Annex 5: Financial Summary NIGERIA: Micro, Small and Medium Enterprise Project Years Ending IYear1 I year2 I year3 I year4 I Year5 I Year6 1 year7 I Total Financing Required Project Costs Investment Costs 9.2 14.6 16.0 14.5 4.1 0.0 0.0 Recurrent Costs 0.3 0.3 0.4 0.4 0.2 0.0 0.0 Total Project Costs 9.5 14.9 16.4 14.9 4.3 0.0 0.0 Total Financing 9.5 14.9 16.4 14.9 4.3 0.0 0.0 Financing IBRDllDA 4.1 6.5 8.1 9.9 3.4 0.0 0.0 Government 0.2 0.2 1.o 0.4 0.1 0.0 0.0 Central 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Provincial 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Co-financiers 0.0 0.0 0.0 IFC, Nigerian private sector 5.2 8.2 7.3 4.6 0.8 0.0 0.0 Total Project Financing 9.5 14.9 16.4 14.9 4.3 0.0 0.0 Main assumptions: - 58 - Annex 6(A): Procurement Arrangements NIGERIA: Micro, Small and Medium Enterprise Project Procurement The procurement system inNigeria i s inthe process o fbeing reformed at all levels. The Government procurement reformprogram was fashioned inline with the recommendations o f the year 2000 Nigeria Country Procurement Assessment Report (CPAR). All the three tiers o f government are operating under the Financial Regulations (FR), which are essentially an internal set o f rules for economic controls. The CPAR identified major weaknesses inthe procurement polices and practices inNigeria and made appropriate short-, medium- and long-term recommendations. Based on the short-term recommendations o f the 2000 Nigeria CPAR, the procurement procedures section o f the FR at the federal government level, was revised on June 27,200 1, to ensure clarity and transparency by incorporating details o f the various procurement methods and their applications for goods, works and services among others. For instance, the ineffective Federal and DepartmentalTender Boards have been abolished while the Ministerial Tender Boards have been strengthened with powers to approve contract awards. Also a Procurement Reform ImplementationUnit (PRIU) and a Steering Committee that would initiate and supervise initial implementation o f reforms have been established at the federal government level. It i s envisaged that the states and local governments will review and revise their procurement system in line with the FGNreform programs. FG i s making arrangements to disseminate the findings and recommendations o f the CPAR at State and LGAs Levels. The reforms have five main features: procurement bill is now before the National Assembly for passage); . Enactment o f a new procurement law based on the UNCITRAL model law. (the Establishment o f a public procurement oversight body, the Public Procurement .. Commission (PCC), independent o f the Tender boards with responsibility for the efficiency and effectiveness o f the procurement function across the public sector; Revision o f key areas o f the Financial Regulations to make them more transparent (this has been effected at thefederal level since June 27, 2001); Deep restructuring o f Tender Boards and approval procedures for contracts. Specifically, . abolish Federal Tender Board and Departmental Tender Boards and strengthening Ministerial Tender Boards by vesting them with powers to approve contract awards (partially fulfilled); and, Buildingprocurementcapacity inthe public sector through a restorationo f professionalisminprocurement and intensive training o f procurement staff. UntilGovernment takes major steps to reformthe procurementpolicies andpractices inthe country (it i s presumed the reform process will reach an advanced stage by FY04), procurement risk for doing business inNigeria is assessedas high.Under this project, this risk will be minimized by incorporating the procurement responsibilitiesinthe terms o f reference for the PMU, a private entity, and requiring the P M U to follow IDA'Sprocurement guidelines. - 59 - Use of Bank Guidelines All goods and services financedunder the IDA credit would be procured inaccordance with the appropriate IDA guidelines (Guidelines: Procurement under IBRD Loans and IDA Credits, January 1995 and as revised inJanuary and August 1996, September 1997, and January 1999; and Guidelines: Selection and Employment of Consultants by World Bank Borrowers, January 1997 and as revised in September 1997, January 1999 and May 2002). To the extent practicable Bank's standard biddingdocuments for goods and Standard Requests for Proposals for consultants as well as all standard evaluation forms would be usedthroughout project implementation. Procurement procedures, as agreed between NIPC, the P M U and IDA, will be described inthe Project Implementation Manual. Advertising A General Procurement Notice (GPN) is mandatory and would be publishedbefore Board presentation in the UNDevelopment Business or Development Gateway and in a national newspaper as provided under the Guidelines. The GPN would be updated on a yearly basis and would show all outstanding International Competitive Bidding(ICB) for goods and all international consulting services. Inaddition, a Specific Procurement Notice (SPN) i s required for all goods to be procured under ICB and Expressions o f Interest (EOI) for all consulting services with a value inexcess o f US$200,000. All N C B procurementpackages for goods and works would be advertised inthe national newspapers. Procurement Capacity Assessment To ensure the appropriate procurement capacity i s in place prior to project effectiveness, an assessment o f the procurement capacity o f the NIPC (as interim PMU) was carried out in accordance with Procurement Services Policy Group (OPCPR) guidelines dated July 15, 2002. The assessment outlines main issues and recommendations and i s in the project files. The assessment revealed that NIPC only carries out small purchases using shopping or direct contracting methods in an amount less than $16,000.00, while its major procurement activities are undertaken at the Office o f the Vice President (its supervisingoffice). Hence, the existing capacity to handle procurement under this project i s inadequate at NIPC. To address this weakness, NIPC (Project Executing Agency), will select through a competitive process, a private management firm (the PMU) using the Quality Cost Based Selection (QCBS) method in line with the Bank's Guidelines: Selection and Employment o f Consultants not later than June 30, 2003. -Also, three months after project effectiveness, the Bank will carry out a procurement capacity assessment o f the PMUto ensure it has sufficient skills mix and capacity to carry out its project-related procurement responsibilities. The assessment will determine the ability o f the P M U to perform procurement coordination responsibilities and will outline the main issues and recommendations for procurement implementation and include an action plan that addresses the following requirements: (a) a management and staffing structure with key officials possessing appropriate technical skills to carry out the day to day procurement activities during the duration o f the Project implementation; (b) preparation o f a comprehensive Procurement Procedures Manual as - 60 - part o f P I M for the project, which will be adopted before project effectiveness; (c) preparation o f a procurement plan for the first year to be discussed, finalized, and agreed by end-June 2004; and (d) as appropriate, attendance at procurement workshops organized by the Bank not later than three months after project effectiveness. ProcurementPlanning The Borrower will prepare a Global Procurement Strategic Plan, and a detailed procurement plan for the first year's activities prior to effectiveness. The plans will be updated yearly, sent to IDA for clearance not later than three months before the end o f each fiscal year. The procurement plan for the first year will be prepared by NIPC (under the guidance o f an experienced Procurement Consultant) based on the initial needs for all project activities. Procurement for subsequent years will be indicative and based on a predetermined set o f activities projectedby beneficiary institutions that have met selection and performance criteria duringthe implementation period. ProcurementImplementationArrangements The overall coordination and implementation o f the project activities would be the responsibility o f NIPC for about the first six months o f project implementation. However, such responsibility will be entrusted to the PMU, which will also be responsible for coordinating all procurement under the project. The guidelines that will be used inpreparing, screening and implementing subprojects will be specified inthe project ImplementationManual. As part o f capacity building under the project, staff o f NIPC and local staff o f the P M U would have access to training on procurement for IDA-funded projects. Component 1- Access to finance i s aimed at increasing access and availability o f financial services to MSMEs through the introduction o f new financial institutions, products and tools, reinforced with selective financial sector legal and regulatory reforms. One o f the major activities under this component will be the selection o f MFIs and commercial banksbased onpre-specified criteria that respect best practice and openness to support MSMEs intheir corporate mission, strategic objectives, operating policies, etc. Expressions o f Interest (EoI) will be called for from the interested MFIs and commercial banks, and the EoIs will explicitly state the criteria to determine the eligibility o f interested applicants. The eligible applicants will submit detailed business plans which will include their portion o f the contribution (i.e. matching grants) towards the implementation o f the overall objective o f this component. MFIs and commercial banks who fulfill the minimumcriteria (which shall be part of a procedures manual prepared for the Credit), will have an acceptable business planbased on verifiable financial information andwill have the requisite matching funds to be considered for access to finance under the proposedproject. Release o f funds will be intranches, based on meeting the contractually agreed performance indicators for the respective tranche released. As the selection o f beneficiaries will be based on specified criteria, business plan, performance indicators. etc. the selected MFIs/commercial banks may use their own procurement procedures to procure the goods and services required to fulfill their performance obligations. Other activities such as technical assistance for establishing the laws and regulations that shall be implemented by NIPC. until a P M U from the private sector has been appointed, will be contracted usingBank procurement procedures. - 61 - Component 2 - Business Development Services. The objective o f this component i s to increase MSMEs' access to quality business services that are both specialized and well-tailored to the specific needs o f MSMEs. This component will assist BDS providers to buildtheir capacity to develop and deliver quality training and consulting services that can assist a large number o f MSMEs to increase their value added and grow. As in the Access to Finance component, selection o f these service providers will be based on minimumeligibility criteria that shall be detailed out inthe project procedure manual which shall be reviewed. The service providers which will be contracted under a performance based contract agreement will use commercial practice in procuring goods and services to execute their performance contract. All other activities under the component such as studies, other consulting services and analytical work, will be contracted using Bank procurement procedures. Detailed procedures for the selection o f MFIs and BDS providers will be defined in a Procedures Manual, which should be acceptable to IDA. Components 3 - 5 - Investment Climate, PubliciPrivate Sector Partnership Development and Project Management, Monitoring and Evaluation are aimed at (i) assisting CAC to reform its registration process and conduct awareness to increase MSMEs understanding of the roles and services o f CAC, (ii) provide advisory services to selected FGN agencies with development responsibilities and the opportunity to access global best practices, and (iii) fund activities such as the financial audit, training, and consultancy assignments required to prepare the implementation manual, monitor and evaluate the impact o f each o f the project components. Procurement o f goods and services under these component will be contracted usingthe Bank's procurement procedures. Procurement Categories Goods The project will finance items such as office equipment, computers and accessories. To the extent practicable, goods and equipment would be combined inpackages worth at least $150,000 and be procured usingInternational Competitive Bidding(ICB) procedures, usingIDA Standard Bidding Documents (SBD). Each contract for goods estimatedto cost between US$30,000 and US$150,000 up to an aggregate o f US$0.48 million would be procured through National Competitive Bidding(NCB) usingnationalprocedures acceptable to IDA.However, since there is no national SBD acceptable to IDA for now inNigeria, IDA SBD for procurement o f goods will be adapted by the project. National competitive biddingprocedures will also ensure that: (i) bids will be advertised in National dailies o f wide circulation; (ii)methods to be usedinevaluation o f bids and the award o f contracts are made known to all the bidders and are not applied arbitrarily; (iii)bidders are given adequate response time at least (four weeks) for preparation and submission o f bids; (iv) bid evaluation and bidder qualification are clearly specified inthe biddingdocuments; (v) no preference margin i s granted to domestic contractors; (vi) interested eligible foreign firms are not - 62 - precluded from participation; (vii) award o f contract will be made to the lowest evaluated bidder substantively responsive to the bidding documents inaccordance with pre-determinedand pre-announced/published and transparent methods; (viii) the bid evaluationreports will clearly state the reasons for rejecting any non-responsive bid; and (ix) prior to issuingthe first call for bids, the draft standard biddingdocuments preparedby the P M U will be submitted to the Association and found acceptable. Procurement for readily available off-the-shelf goods that cannot be grouped or standard specification commodities for individual contracts o f less than US$30,000, up to an aggregate o f US$2 million, would be procured under National Shopping; or International Shopping procedures as detailed in paragraph 3.5 and 3.6 o f the "Guidelines: Procurement under IBRDLoans and IDA Credits" and June 9,2000 Memorandum "Guidance on Shopping" issued by the Bank. To ensure that these limits are observed, each quarterly progress report o f the project would include a list o f the contracts and the table setting out the number and value (inUS$ equivalent) o f contracts issued through Local, International Shopping and National competitive bidding duringthe quarter as well as the cumulative total value (inUS$ equivalent) o f contracts under each o f these two procedures from the date o f the project start-up. ConsultingServices These services would cover implementation and advisory services. As a rule, consultant services will be procuredutilizing the Ouality and Cost Based Selection (QCBS) method. All consultancy assignments estimated to cost US$lOO,OOO or more would be procured through QCBS and would be advertised inthe Development Business and or the Development Gateway and in at least one national newspaper. Inaddition, the scope o f the service may be advertised in an international newspaper or magazine seeking ''expressions of interest." Inthe case o f assignments estimated to cost less than US$lOO,OOO, the assignment may be advertised nationally, and the shortlist made up entirely o f national consultants provided that at least three qualified national firms are available in the country, and foreign consultants who wish to participate are not excluded from consideration. Consultant services (firms) estimated to cost less than the equivalent o f US$lOO,OOO, may be contracted by usingthe Consultants Oualifications (CQ) method inaccordance with paragraph 3.7 o f the Guidelines. All consulting services o f individual consultants (IC) will be procured under individual contracts in accordance with the provisions o f paragraphs 5.1 to 5.3 o f the Guidelines. Consultants for assignments o f a standard routine nature such as audits may be selected on the basis o f Least-Cost method (LC). Single Source Selection: in exceptional cases, this method would be usedin accordance with the provisions o f paragraphs 3.8 to 3.11, with IDA'Sprior agreement. Trainingand Workshops 17. Training/workshops will be carried out on the basis o f approved annual programs that would identify the general framework o f training activities for the year, including the nature o f training/workshops, the number o f trainees, and cost estimates, to be reviewed and cleared by IDA. Selection oftraining institutions for workshops/training should be based on a competitive - 63 - process usingthe Consultant's Qualifications method o f selection. Operating Cost 18. This will include the incremental operating cost arising under the project on account o f the maintenance of equipment and vehicles, fuel, office supplies, utilities, consumables, travel per diem and allowances, travel and accomodation, office rental, but excluding salaries o f public servants. IDA Prior Review 19. Table B provides the prior review thresholds. Each contract for goods estimated to cost US$150,000 equivalent or more will be subject to IDA prior review as per paragraph 2 of appendix Io f the Guidelines. The first National Competitive Biddingpackages for goods shall be subject to IDA prior review. Other contracts will be subject to post review in accordance with paragraph 4 o f Appendix Io f the Guidelines. All consulting contracts costing US$lOO,OOO equivalent or more for firms and US$50,000 and more for individuals will be subject to IDA prior review. All single-source selection o f consultants and terms o f reference for consulting services will be subject to IDA'Sprior review. Any exceptionalextensions to non-prior review contracts raising their values to levels equivalent or above the prior review thresholds will be subject to IDA clearance. All training contracts costing US$15,000 equivalent or more per contract, will be subject to IDA prior review. Post Review 20. Monitoring and evaluation of procurement performance at all levels (national, state, private organization and institutions) would be carried out during IDA supervision missions and through annual ex-post procurement audits. The audits would: (a) verify that the procurement and contracting procedures and processes followed were in accordance with the Development Credit Agreement (DCA); (b) verify technical compliance, physical completion and price competitiveness o f each contract in a selected representative sample; (c) review capacity o f participating agencies inmanaging procurement efficiently; and (d) identify improvements inthe procurement process in light o f any identified deficiencies. - 64 - Procurement methods (Table A) Procurement Method' Expenditure Category ICB NCB Other2 N.B.F. Total Cost 1. Works 0.00 0.00 0.00 0.00 0.00 (0.00) (0.00) (0.00) (0.00) (0.00) 2. Goods 1.40 0.00 0.40 0.00 1.80 Equipment (1.40) (0.00) (0.40) (0.00) (1.80) 3. Services 2.00 1.oo 10.80 28.00 41.80 Consulting (2.00) (1.OO) (10.80) (0.00) (13.80) 4. Training 0.00 0.00 2.80 0.00 2.80 (0.00) (0.00) (2.80) (0.00) (2.80) 5. Operating costs 0.00 0.00 0.60 0.00 0.60 (0.00) (0.00) (0.60) (0.00) (0.60) Grants 0.00 0.00 13.00 0.00 13.00 (0.00) (0.00) (13.00) (0.00) (13.00) Total 3.40 1.oo 27.60 28.00 60.00 (3.40) (1.OO) (27.60) (0.00) (32.00) - 65 - Selection Method Consultant Services Expenditure Category QCBS QBS SFB LCS CQ Other N.B.F. Total cos( A. Firms 2.00 0.00 0.00 0.00 2.50 0.00 26.90 31.40 (2.00) (0.00) (0.00) (0.00) (2.50) (0.00) (0.00) (4.50) B. Individuals 0.00 0.00 0.00 0.00 2.30 7.00 1.10 10.40 (0.00) (0.00) (0.00) (0.00) (2.30) (7.00) (0.00) (9.30) Total 2.00 0.00 0.00 0.00 4.80 7.00 28.00 41.80 (2.00) (0.00) (0.00) (0.00) (4.80) (7.00) (0.00) (13.80) - 66 - Prior review thresholds (Table B) Table B: Thresholds for Procurement Methods and Prior Review' Contract VaIue Contracts Subject to Threshold Procurement Prior Review Expenditure Category (US$ thousands) Method (US$ millions) I. Works !.Goods US$150,000 and above ICB A11 US$30,000-US$150,000 NCB Post Review 1. Services Less than US$30,000 Shopping Post review US$lOO,OOO and above QCBS All Below US$lOO,OOO (firms) CQ Post review US$50,000 and above (individual) Below US$50,000 IC All (individual) IC Post review 1. Training, workshops, US$15,000 and above 1 QCBS/CQ All ;tudy tours Total value of contracts subject to prior review: USD 7,000,000 Overall Procurement Risk Assessment: High Frequency of procurement supervisionmissions proposed: One every six months (includes special procurement supervision for post-review/audits) "Thresholds generallydiffer by country and project. Consult "Assessmentof Agency's Capacity to Implement Procurement"and contact the RegionalProcurementAdviser for guidance. - 67 - Annex 6(B): Financial Management and Disbursement Arrangements NIGERIA: Micro, Small and Medium Enterprise Project Financial Management 1. Summary ofthe FinancialManagement Assessment A. General Objective of the FMSystem 1. The objective of the Financial Management systems i s to support the Executing Agency and implementing unit in deploying project resources to produce the required outputs and with attention to economy, efficiency and effectiveness. Specifically, the FM systems must be capable o f producing timely, understandable, relevant and reliable financial information to enable the implementing units to plan, coordinate, monitor and appraise the Project's overall progress towards the achievement o f its objectives, as well as ensuring that fimds provided will be used for the purposes intended. FinancialManagement 2. NIPC i s the executing agency for the project but it will delegate the day to day implementation o f the project to a private firm, which will be contracted to carry out the role as a Project Management Unit (PMU). NIPC will serve as the oversight body together with a Review Committee (RC), which it will establish. 3. The Finance Department o f NIPC (FDNIPC) will be responsible for managing the financial affairs o f the Project. F D N I P C i s staffed by relevant qualified accountants. Modem internal audit functions would be performed by the Internal Audit Unit of NIPC (IAUNIPC). F D N I P C will be responsible for ensuring compliance with the financial management requirements o f the Bank and the Government, including forwarding the quarterly financial monitoring reports and audited annual financial statements to NIPC, the Review Committee, and to IDA. FDNIPCPMU will jointly prepare budgets. F D N I P C will be responsible for preparing monthly financial reports, quarterly financial monitoring reports, and annual financial statements, as required. 4. All accounts personnel will be sufficiently trained inBank procedures, computer applications and financial management skills. B. Risk Analysis InherentRisks 5. The Country Financial Accountability Assessment (CFAA), which was conducted in C Y 2000, revealed that the systems for planning, budgeting, monitoring and controlling public resources inNigeria have deteriorated to a level that they do not provide any reasonable - 68 - assurance that funds are used for the purpose intended. Risk o f waste, diversion and misuse o f funds was highlyrated until such a time as the CFAA recommendations have been implemented. Some o f the C F A A recommendations have been implemented and some are being implemented. An update o f the CFAA, which is due before C Y 2006 will be required to confirm the current level o f risk. 6. To minimize the aforementioned risks and ensure the appropriate financial management capacity i s inplace prior to Project effectiveness, an assessment o f the financial management capacity o f the NIPC has been undertaken. ControlRisks 7. The overall Project risk from a financial management perspective i s considered moderate, provided: (a) the weaknesses described inparagraph 9 are satisfactorily addressed; (b) the financial management action plan described inparagraph 18 i s fully implemented; and (c) the conditions for Board are met. Strengths and Weaknesses 8. Strengths: NIPC has a strong Finance Department (FDNIPC). The department has relevantly qualified staff, effective financial controls, including adequate segregation o f duties, internal check and monitoring, and adequate communication. NIPC also has external auditors that have regularly audited its accounts. NIPC and its R C have an oversight responsibility for the project and will review Project progress, and review and approve work plans and budgets. 9. Weaknesses: The main weaknesses are: (a) that the Internal Audit Unit in NIPC (IAU/NIPC) i s under-resourced and weak and requires strengthening through the recruitment o f a professionally qualified internal auditor; and (b) that NIPC does not have any experience in implementing IDA-assisted projects. C. FinancialManagementSystems Funds Flow and BankingArrangements 10. The overall project funding will be from the IDA credit and investments from local and foreign investors and beneficiaries. IDA will disburse the credit through a Special Account, which will be managed by the FD/NIPC. 11. The following accounts will be opened and maintained by FD/NIPC: A Special Account inUS Dollars to which the initial deposit and replenishments from IDA will be lodged. A Current (Draw-down) Account inNaira ina bank to which draw-downs from the Special Account will be credited once or twice per month inrespect o f incurred eligible expenditures. Following the immediate payments inrespect o f those eligible expenditures, the - 69 - balance on this account should be zero. Funds will be credited. ... A Current (Project) Account inNaira ina bank to which Counterpart Fundswill be deposited. A Current (Naira Interest) Account inNaira ina bank to which interests on Counterpart A Current (US$ Interest) Account inabank to which interests on the Special Account will be credited. 12. FD/NIPC will maintain an IDA Ledger Loan Account (Washington) in U S Dollars/Naira/SDR to keep track o f draw downs from the IDA credit. The account will show (a) deposits made into a bank by IDA, (b) drawn downs by NIPC, (c) direct payments by IDA, and (d) opening and closing balances. 13. All bank accounts will be reconciledwith bank statements on a monthly basis by FD/NIPC. The bank reconciliation statements will be reviewedby designated officials, and identified differences will be expeditiously investigated. Also, FD/NIPC will reconcile monthly the IDA Ledger Loan Account with the Disbursement Summary providedby the IDA. 14. FD/NIPC will be responsible for preparing and submittingto the World Bank applications for withdrawal, as appropriate. Appropriate procedures and controls will be instituted to ensure disbursements and flow o f funds are carried out in an efficient and effective manner. The FD/NIPC will maintain a cumulative record o f draw-downs from the Credit that will be reconciled monthly with the Disbursement Summary provided by the Bank. Detailedbanking arrangements, including control procedures over all bank transactions (e.g. check signatories, transfers, etc.), will be documented by the FD/NIPC as described in the financial procedures manual (FPM). D. Action Plan 15. The following actions are to be implemented as specified 1. Supervision Plan 16. Supervision activities will include a review o f quarterly FMRs; review o f annual audited financial statements and management letters as well as timely follow-up o f issues arising during implementation; annual SOE reviews; participation in project supervision missions as appropriate; and updating the FMrating in the Project Status Report (PSR). 2. Audit Arrangements Internal Audit 17. The Internal Audit Unit of NIPC (IAU/NIPC) will perform internal audit activities for the project. NIPC will strengthen the Unit by appointing a professionally qualified internal auditor to head the Unit. Regular internal audit reports will be submitted to the NIPC, RC and the Accountant General. - 70 - ExternalAudit 18. Audited Project Financial Statements for the project will be submitted to IDA within six months after year-end. Relevantly qualified external auditors will be appointedbased on Terms o f Reference acceptable to the Bank to perform these audits. 19. Besides expressing an opinion on the Project Financial Statements in accordance with International Standards on Auditing (ISAs), the auditors will be required to comment on whether counterpart funds have been provided regularly and used in accordance with the financing agreement. 20. In addition to the audit report, the external auditors will be expected to prepare Management Letters giving observations and comments, and providing recommendations for improvements in accounting records, systems, controls and compliance with financial covenants in the IDA agreement. 3. Disbursement Arrangements 21. By effectiveness, the Project will not be ready for report-based disbursements. Thus, at the initial stage, the transaction-based disbursement procedures (as described inthe World Bank Disbursement Handbook) will be followed, i.e. direct payment, reimbursement, and special commitments. 22. When project implementationbegins, the quarterly Financial Monitoring Reports (FMRs) produced by the project will be reviewed. Where the reports are adequate and produced on a timely basis, and the borrower requests conversion to report-based disbursements, a review will be undertaken by the Task Team Leader (TTL) to determine if the project i s eligible. The adoption o f report-based disbursements by the project will enable it to move away from time-consuming voucher-by-voucher (transaction-based) disbursement methods to quarterly disbursements to the Project's Special Account, based on FMRs. 23. Detailed disbursement procedures will be documented inthe FPM. Planningand Budgeting 24. Cash Budget preparationwill reflect financial projections or forecasts for the life o f the project (analyzed by year) and will be prepared on an annual basis. On an annual basis, FD/NIPC incollaborationwith the P M Uwill prepare the cashbudget for the coming periodbasedon the work program. The cash budget should include the figures for the year, analyzed by quarter. The cash budget for each quarter will reflect the detailed specifications for project activities, schedules (including procurementplan), and expenditure on project activities scheduled respectively for the quarter. (Guidance on the preparation o f budgets i s available inthe Bank publication entitled "Financial Monitoring Reports: Guidelines to Borrowers"). The annual cash budget will be sent - 71 - to the Task Team Leader at least two months before the beginningof the project fiscal year. 25. Detailedprocedures for planning and budgeting will be documented inthe Financial Procedures Manual (FPM) Fixed Assets and Contracts Registers 26. At the FD/NIPC, a Fixed Assets Registerwill be prepared, regularly updated and checked. A Contracts Register will also be maintained in respect of all contracts with consultants and suppliers. Also, a quarterly Contract Status Reports will be prepared. Control procedures over fixed assets and contracts with consultants and suppliershendors for the States and federal levels will be documented inthe FPM. Information Systems 27. NIPC will hire a financial management consultant who will, among other things, select and install a computerized accounting package to be used by FD/NIPC for NIPC and the project, and train FD/NIPC staff inthe use of the software incompliance with the FPM. Financial Reporting and Monitoring 28. Monthly, quarterly and annual reports will be prepared to allow monitoring of project implementation. The reports will be submittedto the PMU, RC, NIPC, FMOF and IDA. On a monthly basis, the FD/NIPC will prepare and submit the following reports to the aforementioned: 0 A Bank Reconciliation Statement for each bank account; Monthly Statement of CashPosition for project funds from all sources, taking into consideration significant reconciling items; A monthly Statement of Expenditure classifiedby project components, disbursement categories, and comparison with budgets, or a variance analysis; and 0 Statement of Sources and Uses of Funds (by Credit CategorytActivity showing IDA and Counterpart Funds separately); 29. The following financial monitoring reports will be prepared by FD/NIPC incollaboration with the PMU on a quarterly basis and submittedto IDA, RC, NIPC and FMOF: 0 Financial Reports whichinclude a Statement showing for the period and cumulatively (project life or year to date) inflows by sources and outflows by main expenditure classifications; beginningand ending cashbalances o f the project; and supporting schedulescomparing actual and planned expenditures. The reports will also include cash forecast for the next two quarters. 0 Physical Progress Reports, which include narrative information and output indicators (agreed duringproject preparation) linkingfinancial information with physical progress, and highlight issues that require attention. 0 Procurement Reports, which provide informationon the procurement of goods, works, - 72- and related services, and the selection of consultants, and on compliance with agreed procurement methods. The reports will compare procurementperformance against the plan agreed at negotiations or subsequently updated, and highlight key procurement issues such as staffing and buildingBorrower capacity. 0 SOE Withdrawal Schedule listing individual withdrawal applications relatingto disbursements by the SOE method, by reference number, date and amount. 0 The annual project financial statements, which will be prepared by FD/NIPC and submittedto IDA, RC, NIPC and FMOF will includethe following: o A Statement of Sources and Uses of Funds (by Credit Categoryhy Activity showing IDA and Counterpart Funds separately); o Statement of Cash Position for Project Funds from all sources; o Statementsreconcilingthe balances on the various bank accounts (includingIDA Special Account) to the bank balances shown on the Statement o f Sources and Uses o f funds; o SOE WithdrawalScheduleslisting individual withdrawal applications relatingto disbursements by the SOE Method, by reference number, date and amount; o Notesto the FinancialStatements. 30. Indicative formats for the reports are outlined intwo Bank publications: (a) Financial Reporting and Auditing Handbook (FARAH) - monthly and annual reports. Monitoring Reports: Guidelinesto Borrowers-Quarterly FMRs, and (b) Financial Accounting, AccountingPoliciesand Procedures 3 1, IDA and Counterpart Fundswill be accounted for by the Project on a cashbasis. This will be augmented with appropriate records andprocedures to track commitments and to safeguard assets. Also, accounting records will be maintained in dual currencies (Le. Naira and US dollars). 32. The Chart o f Accounts will facilitate the preparation of relevant monthly, quarterly and annual financial Statements, including information on the following: 0 Total project expenditures 0 Total financial contribution from each financier 0 Total expenditure on each project component/activity, and Analysis of that total expenditure into civil works, various categories of goods, training, consultants and other procurement and disbursement categories. 33, Annual financial Statementswill be prepared in accordance with International Accounting Standards (IAS). 34. All accounting and control procedures will be documented inthe FPM, a living document that will be regularly updated by the Project Accountants. - 73 - Allocation of credit proceeds (Table C) Table C: Allocation of Credit Proceeds Expenditure Category Amount in US$million Financing Percentage Goods 1.80 100FE, 90% LC Consultant Services 11.60 90% Training & Workshops 2.80 100% Incremental Operating costs 0.60 80% Grant 13.00 100% IIUnallocated PPF II 0.60 1.60 II II Total Project Costs with Bank 32.00 Financing Total 32.00 Use of statements of expenditures (SOEs): 35. All applications for the withdrawal o fproceeds from the credit will be fully documented, except for: (i) expenditures o f contracts with an estimated value o f US$150,000 each or less for goods, (ii) $100,000 or less for consulting firms; (iii) US$50,000 or less for individual consultants, and (iv) $15,000 or less for training, workshops and incremental operating costs; (v) $100,000 or less for payments on account o f Performance Grants. Documentation supporting all expenditures claimed against SOEs will be retained by FD/NIPC, and will be available for review when requested by IDA supervision missions and project auditors. All disbursements are subject to the conditions o f the Development Credit Agreement and the procedures defined inthe Disbursement Letter. Special account: 36. To facilitate disbursements for eligible expenditures for goods and services, the flow-of-funds mechanism has been designed with the following guidingprinciples: (a) the FD/NIPC controls and accounts for project funds; (b) bottlenecks in the transfer o f funds are minimized via adequate Financial Procedures Manual, including service standards; and (c) implementation transparency and accountability. The NIPC will open a Special Account, which will be managed and administered by the FD/NIPC, ina commercial bank to cover part o f IDA'S share of eligible expenditures. The flow of funds i s detailed in section C above. FD/NIPC will be responsible for submittingmonthly replenishment applications with appropriate supporting documents for expenditures. To the extent possible, all o f IDA'S share of expenditures should be paid through the special account. Unless otherwise agreed by the Bank, all expenditures o f less than US$l,OOO,OOO will be made through the Special Account. 37. The Special Account will be replenished through the submission o f Withdrawal - 74 - Applications on a monthly basis and will include reconciledbank statements and other documents as may be required until such time as the Borrower may choose to convert to report-based disbursement. All disbursements will be channeled through the SA. -75 - Annex 7: Project Processing Schedule NIGERIA: Micro, Small and Medium Enterprise Project Project Schedule Planned Actual Time taken to prepare the project (months) 9 First Bank mission (identification) 05/12/2003 IAppraisal mission departure I 1013112003 I I Negotiations 11/14/2003 IPlanned Date of Effectiveness II 06/15/2004 III II Prepared by: Peter Mousley Preparation assistance: Bank staff who worked on the projec included: Name Snecialitv Peter J. Mousley Task Team Leader, Senior Private Sec. Dev. Specialist, AFTPS Akin Adeoye Business Development Officer, CSMAN Chau-Ching Shen Senior Financial Officer, LOAG2 GokhanAkinci Investment Policy Officer, CICFA IreneArias BusinessDevelopment Officer, CSMDR Bay0 Awosemusi Senior ProcurementSpecialist, AFTPC KarenAlexandra Hudes Senior Counsel, LEGAF Marilyn SwarmManalo Operations Officer, AFTPS Victoria Kwakwa Lead Economist, AFTP3 Leila McKimmon Webster Senior Program Officer, CSMDR Adenike Mustapha Financial ManagementSpecialist Edward Olowo-Okere Sr. Financial Management Specialist, AFTFM John Philippe Prosper Chief Financial Officer, CAFSI Andrew Alli Country Manager, CAFWS IsmailSamji Senior Investment Officer, CGFMF GeorgetteB.Johnson Program Assistant, AFTPS Makanda Kioko Program Officer, CGFMF Mary Agboli Consultant, CSMDR Gloria Kwembe Team Assistant, AFC12 Felicia Ogidan Program Assistant, AFC12 Sidonie Jocktane Program Assistant, AFTPS -76 - Annex 8: Documents in the Project File* NIGERIA: Micro, Small and Medium Enterprise Project A. Project Implementation Plan Detailcost tables anddraftProject ImplemenationManual(PIM) B. Bank Staff Assessments Results of the Nigeria Firm Survey, RegionalProgramon EnterpriseDevelopment (RPED Paper #118, April 2002), World Bank. The Implementation Completion Report (ICR) on the WorldBank Small and Medium Enterprise Development Project (Loan 2995-UNI), Report #16811, June 1997. Africa Program Framework Paperfor a Joint IDA/IFC Micro, Small and Medium Enterprise Development Pilot Programfor Africa, World BankJIFC (consideredby the Boardof ExecutiveDirectors, June 19,2003). SME mapping exercise undertakeninparallelwith a survey on Nigerianfirms conducted under the WED o f the World Bank, October 2001. "Joining the Racefor Non-Oil Foreign Investment, conductedby the Foreign " InvestmentAdvisory Services; "Direct Support to Private Firms - Evidence of Effectiveness", G. Batra and S. Mahmood, 2001 and `YDA's Partnership for Poverty Reduction (FY94-FY00): An Independent Evaluation , OED, 2001,pp 31-33. " C. Other The recently completed "Evaluation of the Mekong Project Development Facility ", Nexusand Assocs., June, 2002 provides important insightsinto the best design parameters for BDS provider capacity building. Guiding Principlesfor Donor Intervention Business Development Servicesfor Small Enterprises: Guiding Principlesfor Donor Intervention, Committeeof Donor Agencies for Small EnterpriseDevelopment, February 2001. *Including electronic files - 77 - Annex 9: Statement of Loans and Credits NIGERIA: Micro, Small and Medium Enterprise Project 27-0ct-2003 Difference between expected and actual Original Amount in US$ Millions disbursements' Project ID FY Purpose IBRD IDA Cancel. Undisb. Orig Frm Rev'd PO69892 2004 NG Local Empowerment & Envir.Mgmt. 0.00 70.00 0.00 72.35 1.03 0.00 PO71494 2003 Universal Basic Ed. 0.00 101.00 0.00 106.13 18.54 0.00 PO80295 2003 Polio Eradication 0.00 28.70 0.00 18.82 0.16 0.00 PO74963 2003 NG Lagos Urban Transport Project 0.00 100.00 0.00 107.76 13.39 0.00 PO72018 2002 Nigeria:Transmission Development Project 0.00 100.00 0.00 105.40 47.38 15.12 PO70291 2002 HlVlAiDS Prog. Dev. 0.00 90.30 0.00 96.32 25.17 0.00 PO70290 2002 2nd Health Systems Dev. 0.00 127.01 0.00 142.16 32.02 0.00 PO69901 2002 Community Based Urban Development 0.00 110.00 0.00 122.54 32.42 6.37 PO69086 2001 Com.-Based Pov. Reduct. 0.00 60.00 0.00 55.33 14.56 8.56 PO70293 2001 NG PRiVATlZATlON SUPPORT PROJECT 0.00 114.29 0.00 117.97 37.62 0.00 PO66571 2000 2nd Primary Educ. 0.00 55.00 0.00 44.65 42.92 25.36 PO65301 2000 ECON.MGMT.CAP.BLDG. 0.00 20.00 0.00 8.18 0.02 0.00 PO64008 2000 SMALL TOWNS WATER 0.00 5.00 0.00 3.40 3.08 2.06 Total: 0.00 981.30 0.00 1001.01 268.30 57.46 - 78 - NIGERIA STATEMENTOF IFC's HeldandDisbursedPortfolio June 30 2003 - InMillions USDollars Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 2000 CAPE FUND 0.00 7.50 0.00 0.00 0.00 5.40 0.00 0.00 2000 Citibank (Nig) 18.28 0.00 0.00 0.00 8.28 0.00 0.00 0.00 2001 Delta Contractor 15.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2000 DiamondBank 14.00 0.00 0.00 0.00 14.00 0.00 0.00 0.00 2000 FSB 4.50 0.00 18.00 0.00 0.00 0.00 18.00 0.00 1992193 FSDH 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2000 GTB 18.00 0.00 0.00 0.00 18.00 0.00 0.00 0.00 2000 IBTC 20.00 0.00 0.00 0.00 20.00 0.00 0.00 0.00 1981/85/88 IkejaHotel 0.00 0.25 0.00 0.00 0.00 0.25 0.00 0.00 1993 Tourist Co Nir 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2001 UBA 30.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1998 AEF Ansbby 0.10 0.00 0.00 0.00 0.10 0.00 0.00 0.00 1997 AEF Ekesons 0.06 0.00 0.00 0.00 0.06 0.00 0.00 0.00 1999 AEF Global Fabri 0.32 0.00 0.00 0.00 0.32 0.00 0.00 0.00 1999 AEF Hercules 1.30 0.00 0.00 0.00 1.30 0.00 0.00 0.00 1999 AEF Hygeia 0.19 0.19 0.00 0.00 0.19 0.19 0.00 0.00 1996 AEF Mid-East 0.00 0.00 0.12 0.00 0.00 0.00 0.12 0.00 1997 AEF Moorhouse 0.79 0.00 0.00 0.00 0.79 0.00 0.00 0.00 2000 AEF Oha Motors 0.84 0.00 0.00 0.00 0.84 0.00 0.00 0.00 1997 AEF Radmed 0.25 0.00 0.00 0.00 0.25 0.00 0.00 0.00 2000 AEF SafetyCenter 0.50 0.06 0.00 0.00 0.50 0.06 0.00 0.00 1997 AEF Telipoint 0.08 0.00 0.00 0.00 0.08 0.00 0.00 0.00 1995 AEF Vinfesen 1.oo 0.00 0.00 0.00 1.oo 0.00 0.00 0.00 1994 Abuja Intl 1.75 0.71 0.00 0.00 1.75 0.71 0.00 0.00 2003 Adamac 25.00 0.00 0.00 15.00 11.56 0.00 0.00 6.94 1964166170/89 Arewa Textiles 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Total Portfolio: 151.96 8.71 18.12 15.00 79.02 6.61 18.12 6.94 Approvals Pending Commitment FY Approval Company Loan Equity Quasi Partic 2002 MTNN 0.08 0.01 0.02 0.00 2002 NTEF ANZ - 0.01 0.00 0.00 0.00 2002 NTEF- SCB 0.02 0.00 0.00 0.00 Total Pending Commitment: 0.11 0.01 0.02 0.00 - 79 - Annex I O : Country at a Glance NIGERIA: Micro, Small and Medium EnterDrise Proiect Sub- POVERTYand SOCIAL Saharan Low- Nigeria Africa income Developmentdiamond' 2002 Population,mid-year (millions) 132.8 688 2,495 Life expectancy GNI per capita (Atlas method, US$) 290 450 430 GNi (Arias method, US$ billions) 38.7 306 1,072 T Average annual growth, 1996.02 Population (%) 2.5 2.4 1.9 Labor force I%) 2.6 2.5 2.3 GNI per Most recent estimate (latest year available, 1996-02) capita Poverty (% ofpopulation below nationalpoverty line) Urban populationI%of total population) 46 33 30 Life expectancyat birth (years) 45 46 59 Infantmortality (per 1,000iive births) 109 105 81 Child malnutrition (% of children under 5) 31 Access to improvedwater source Access to an improvedwater source (% ofpopulation) 62 58 76 illiteracy (% ofpopulationage Is+) 33 37 37 - Gross primaryenrollment (% of school-agepopulation) 82 86 95 Nigeria Male 89 92 103 .____ Low-incomegrouD Female 74 80 87 KEY ECONOMICRATIOS and LONG-TERMTRENDS 1982 1992 2001 2002 Economic ratios' GDP (US$ billions) 49.7 32.7 42.5 43.4 Gross domestic investmenVGDP 21.8 20.1 23.3 Exports of goods and servicesiGDP 16.3 42.2 44.4 37.7 Trade Gross domestic savingsiGDP 14.0 23.5 24.5 17.4 T Gross nationalsavings/GDP 11.4 16.9 22.9 14.6 Current account balanceiGDP -13.5 -4.0 2.8 -8.5 InterestpaymentsiGDP 1.7 5.6 4.6 Total debVGDP 24.1 88.7 73.2 69.4 Total debt serviceiexports 16.1 30.9 19.0 18.1 1 Present value of debt/GDP 72.6 Presentvalue of debVexports 160.6 Indebtedness 1982-92 1992-02 2001 2002 2002-06 (average annualgrowth) -Nigeria GDP 4.2 2.3 2.9 -0.9 3.5 GDP Der caoita 1.2 -0.4 0.6 -3.1 0.5 Low-incomegroup ~ ~ ~~~ STRUCTURE of the ECONOMY 1982 1992 2001 2002 1 Growth of Investmentand GDP (%) (% of GDP) Agricuiture 30.6 23.8 34.6 37.4 Industry 33.3 58.3 35.5 28.8 A Manufacturing 9.6 4.3 4.2 Services 35.8 17.9 29.9 33.8 Private consumption 69.9 58.1 45.5 55.4 General governmentconsumption 16.1 18.4 30.0 27.2 Imports of goods and services 22.3 40.5 39.9 43.8 1982-92 1992-02 2001 2o02 I (average annualgrowth) Growth of exports and Imports (%) 1 Agriculture 4.8 3.8 3.8 5.3 2o Industry 2.4 0.8 1.5 -4.8 10 Manufacturing 2.8 1.3 3.6 Services 6.0 2.4 3.2 -4.3 O Private consumption -1.8 -2.0 -12.5 7.2 -lo General governmentconsumption -1.0 10.5 22.9 -11.6 -201 Gross domestic investment 2.2 6.6 13.3 20.5 expo exports *imports Imports of goods and services -8.9 6.5 11.3 8.6 - ao - PRICES and GOVERNMENT FINANCE 1982 1992 2001 2002 Domestic prices Inflation(%) I (% change) Consumer prices 7.7 44.6 18.9 12.9 Implicit GDP deflator 2.6 83.6 7.8 11.6 Government finance (% of GDP, includes current grants) Current revenue .. 35.1 46.9 40.2 Current budget balance .7.6 16.7 7.1 2.9 Overall surplus/deflcit -3.3 -5.8 -GDP deflator -CPI I TRADE 1982 1992 2001 2002 (US5 millionsj Total exports (fob) 12,154 11,866 17,949 14,912 Crude petroleum 11,686 11,642 16,574 13,306 Liquefled naturalgas 708 886 Manufactures 36 86 89 Total imports (cio 17,730 9,642 13,619 14,752 Food 2,890 807 1,790 1,917 Fuel and energy 2,717 3,470 I Capital goods Export price index (1995=100J 166 110 146 152 98 B? 98 99 00 D l Import price index (1995=100J 63 89 85 64 EiExports Imports O2 Terms of trade (1995=100) 293 123 175 181 BALANCE of PAYMENTS I 1982 1992 2001 2002 (US$ millions) Current account balanceto GDP (Oh) Exports of goods and services 12,607 12,034 16,943 15,932 Imports of goods and services 17,210 11,539 17,041 18,455 l5 T Resource balance -4,602 495 1,902 -2,523 10 Net income -1,661 -2,569 -2,482 -2,956 5 Net current transfers .. 776 1,773 1,812 0 Current account balance -6,693 -1,298 1,193 -3,667 5 Financing items (net) 4,326 -717 -170 676 -10 Changes in net reserves 2,367 2,015 -1,023 2,991 .15 Memo: Reserves including gold (US$millions) 1,639 2,135 10,423 7,233 Conversion rate (DEC, local/US$J 1.0 19.0 111.6 121.0 EXTERNAL DEBT and RESOURCE FLOWS 1982 1992 2001 2002 (US$ millions) Composltion of 2002 debt (US$ mill.) Total debt outstandingand disbursed 11,972 29,019 31,119 30,116 IBRD 674 3,174 1,337 1,275 A: 1,275 IDA 37 80 621 676 0:1.723 B: 676 Total debt service 2,087 3,750 3,659 2,933 IBRD 85 555 285 251 IDA 1 1 13 16 Composition of net resourceflows Official grants Official creditors 169 196 -1,464 Private creditors 2,417 -1,542 -184 Foreign direct investment .. 714 1,796 1,950 Portfolio equity 0 0 0 I E:22,446 World Bank program Commitments I00 581 305 436 A IBRD E . Bilateral Disbursements 144 296 27 20 B IDA D -Other multilateral F Private . Principal repayments 33 295 215 189 C IMF --- G -Short-term Net flows 111 1 -188 -169 Interest payments 53 262 83 74 Net transfers 59 -261 -271 -243 - 81 - Additional Annex 11: Eligibility and Performance Criteria for Financial and BDS Intermediaries NIGERIA: Micro, Small and Medium Enterprise Project 1. DRAFT SELECTIONCRITERIA FOR BUSINESSDEVELOPMENT SERVICE PROVIDERS Eligibility NGO\Is and enterprises have significant track records inthe relevant areas as set out inthe objectives identified inthe Expressions o f Interest Notification Absorptive capacity (financial, managerial, operationally - human and systems resources, application o f best practice methodology) for additional operations and programming initiatives Highcapacity to deliver good quality financial statements and audited accounts since this will be one of the key sources o f measuring their performance. Demonstrated commitment by their willingness to contribute their own resources to the development o f the program Perform ance Criteria The program will support BDS providers to expand or develop and market new products (to be defined inthe Expression o f Interest Notification) according to the following criteria related to sustainability, outreach and impact. A comprehensive business plan will be requiredwith detailed financial and operational plans addressing, inter alia: Potential outreach, measured by the expected increase in the number of clients reached, sales growth, and growth inthe number o f new products developed and delivered; m Potential impact measured by the expected change inthe percent o f SMEs that purchase services from the provider; Potential sustainability measured by sustained increase innew clients and sales, decrease in unit costs and increase infinancial sustainability over time, Le., cost recovery (operating revenues/operating cost) increases. Proposals will, to the extent possible be benchmarked against industrybest practices. 2. DRAFT SELECTIONCRITERIA FORFINANCIAL SERVICEPROVIDERS This comprises various initiatives to develop new institutions and new products to extend commercial financial services to MSMEs. What follows pertains to the start-up of new microfinance institutions targeted on MSMEs and development of new products to be implementedby existing financial institutions. - 82 - A. SelectionCriteriafor Proposalsto Establish New CommercialMicro and Small Business (MSB) Finance Institutions Eligibility Criteria Capacity to fulfill objectives as identified in the Expressions o f Interest Notification, based on: m The experience, success record and reputation o f the strategic investor in starting, managing and expandingcommercial M S B finance institutions. The experience, success record and reputation of the technical services provider. The experience, track record and reputation o f the proposed shareholders. Absorptive capacity (financial, managerial, operationally - human and systems resources, application o f best practice methodology) for additional operations and programming. Demonstratedcommitment by their willingness to contribute their own resources to the development o f the program. Commercial investors will be required also to submit a statement o f interest which will be expected to address, and provide evidence of, the following: Corporate mission Background o f founder(s), board o f governors and senior management Commitment to transparency and good governance Commitment to support the mission, goals, objectives and sustainability o f the Project MFI Policy on conflicts o f interest Performance Criteria: The program will support micro and small business finance providers to expand or develop and new financial products and institutions (to be defined in the Expression o f Interest Notification) according to the following CGAP-compliant criteria related to sustainability, outreach and impact. Sustainability and cost effectiveness - commercially viable operation within timebound period m Outreach - growth o f loan portfolio meeting financial prudential standards for commercial viability Impact - A comprehensive 5 year business plan for the project that clearly details how the project will fulfill sustainability, outreach and impact objectives in line with Expressiono f Interest Notification. Proposals will be benchmarked against industrybest practices, including: (a) Microfinance Consensus Guidelines on the definitions o f selected financial terms, ratios, and adjustments (reference: http://www.cgap.org/publications/guidelines.html) - 83 - (b) Disclosure Guidelines for Financial Reportingby MFIs (reference: http://www,cgap.org/publications/guidelines.html) (c) The MIXMarket which links investors, MFIs and service providers (reference: http://www.mixmarket,org) (d) Industryperformancebenchmarks (reference: http://www.mixmbb.org/en/) B. Downscalingof Commercial BanksintoMicro, Smalland MediumBusiness Finance: Eligibility Criteria: Commercial banks will be required to submit a statement o f interest which will be expected to .... address, and provide evidence of, the following: Corporate mission Background o f founder(s), board o f governors and senior management Commitment to transparency and good governance Commitment to support the mission, goals, objectives and sustainability o f the downscaling project inparticular after the technical assistance program i s fully implemented Financial capacity a Managerial capacity . Existence o f a branch network and other infrastructure suitable for implementing a cost-effective, efficient downscaling program inboth urban and rural areas Ability and willingness to implement the programbasedon a good faith effort to ensure program success, including bearing the costs o f that portion o f the program not covered by grant fundingand to bear 100%o f the cost o frunningthe downscaling program after the grant funding i s completed. Such costs to include but not be limited to loan officer salaries, MIS, travel, . security, promotion and financial reporting Use o f best practice methodology inthe bank's core business Policy on conflicts of interest . Performance Criteria: Sustainability and cost effectiveness - commercially viable operation within timebound period . Outreach - growth o f loan portfolio meeting financial prudential standards for commercial viability Impact - A comprehensive 5 year business plan for the project that clearly details how the project will fulfill sustainability, outreach and impact objectives in line with Expression o f Interest Notification. Proposals will be benchmarked against industrybest practices. - 84 - Additional Annex 12:Draft Outline of the Performance Framework NIGERIA: Micro, Small and Medium Enterprise Project Approach: e Assessing results at four levels: output, intermediate outcome, economic outcome and impact across the three principal components o f the project at the institutional (intermediate level o f M S M E service providers/facilitators) and at end-user (MSME firm level) target groups. e IntermediaryLevelIndicators: The project provides "performance-based" technical and capacity buildingassistance to a range o f private, public and NGO/I facilitators and providers o f policy, regulatory, business development services, and financial services. This funding will be allocated inaccordance with eligibility and operational performance criteria pertaining to outreach, impact and sustainability performance indicators. e End-User M S M E Firm Performance Indicators: The results measures set out inthe logframe include - at the impact level - firm and industry-level indicators. Inline with World Bank Private Sector Development Strategy, these impact-level results look to confirm the link between project activities and firm performance. Also, it i s recognized, as set out in the Joint IDA/IFC Africa M S M E Program Framework Paper, that "observing firm level changes.. .to (project) interventions will require experimental models of evaluation, which can be complex and costly in execution.. .". This will involve assessments o f the performance o f specific firms that are beneficiaries o f the project, complemented by industry, regional and national benchmarking (as appropriate) and PICS-type survey work. e RPEDRole: Inaddition to the provision o ftechnical advice on the design, implementation and analysis of the different enterprise surveys undertakenby the project, RPED support will be key inthe design o f the performance framework and advising on data requirements\costs and cost\benefit analyses undertaken o f project impact. Issues to be Addressed: e Indeveloping a picture o fthe project impact, the principal question to be answered is whether the subsidy provided by the Government through this IDA credit resulted in sustained improvements in firm performance, additional to what would have been achieved without the subsidy. To address this question it is necessary to compare with both "before and after" (assess target firms benefiting from the project both ex ante and ex post) and "with and without" (assess target firms performance relative to those who have not benefited from the project) controls. e Two other major issues will needto be borne inmindwhen trying to isolate the effects o f the project: (i) needto control for other factors inthe enabling environment that may be the affecting firm performance, inaddition to the project; (ii)the difficulties posed by selection bias, inthat firms benefiting from the projectwill tendto be ones that are more successful inthe first place, bringinginto question the additionality generated by the project subsidy. - 85 - 0 Inorder to do this, it will be necessary to undertake a baseline collation ofrelevant performance data o f firms in a given industryand then trace performance o f both client firms and a random number o f firms that do not receive project benefits. Other statistical techniques and applications will be required to control for "other factors'' and selection bias. The practicability o f doing this sort o f analysis varies across the project components. o Investment Climate: Inthe case o f the registration, the project i s targeting new entrants, so before\after scenarios can not be practically assessed. But the project should look at the level o f investment and access to services at a recently registered firm versus similar firms that remain inthe informal sector. Inthe case of the ADR sub-component, the project can trace economic impact o f settling a dispute - by determining from the firms that are part o f the successful pilot caseload exercises, the ways in which the resolution o f their case impacts on subsequent business and investment decisions. 0 Financial Services: It will be necessary to determine iffundingprovidedthe additionality required to jump-start new financial services to MSMEs and to what extent does the M S M E portfolio o f institutional beneficiaries (MFIs, commercial banks and leasing companies) increase as a result o f the intervention. Ex ante and ex post information will be required from the f i r m s receiving the loans to determine how these funds were used. On this basis it will be possible to construct a picture o f the productivity impacts that the credit provided to the firms. o BDS: Inthe case o f the industrysub-component, baseline productivity, labor and wage rate information will be required as well as specific ex ante and ex post information on those firms that receive services that are supported by the project. This will allow a productivity story to be constructed that addresses both the before\after as well as the with\without project assistance. This exercise would need to be reproduced for each industrythe project selects for support. In the case o f the BDS Fund, where the clients are more likely to be informal micro and start-up enterprises, good data on wages, value-added and labour may be even harder to obtain. But a decision will need to be made as to whether the cost i s merited and the data i s sufficiently robust to be usable. A second best solution may be to determine employment and sales level increases. One way to control for selection bias might be to weight results by the scores they obtain that enable them to access funds (assuming a competitive selection process). 0 Inadditionto the firm-level impacts, there are also the additional externalities generated as a result o f the demonstration effects that the project i s seeking to generate at a sector, regional or market level. The demonstration effects are intended to have a longer term impact on PSD perceptions and performance. This can be tracked through survey instruments - designed so they are consistent with the core PICS - but tailored to industry and State-level target groups as well as national-level groups. M S M E projects are unlikely to have a statistically significant impact on poverty reduction. There are at least three main reasons for this: (i) these are smaller projects, targeting a relatively small sample o f the M S M E population inplaces where there are other major variables at play within the enabling environment; (ii)the M S M E project will have its own selection bias, focusing - 86 - its support on stronger MSMEs that are arguably less likely to employ the poor; (iii) selection the bias issue identified earlier will also likely meanthat the firms that show performance improvements were pre-disposed this way and it may be difficult to provide statistical evidence that the project provided additionality inthis respect. While it may not be possible to arrive at a quantitative assessment o f the poverty reduction, qualitative assessments could be generatedthough case studies o f individual firms, where it i s first ascertained that they employ "poor people". The task would then be to trace the effects o f project support through to the incomes and other related assets o f the employees in beneficiary firms (both providers and end-users). Another way in which MSMEprojects could have a poverty impact i s on the consumption, rather than the production side. Where MSMEs lower the price or improve the quality o f products consumed by poor households - other things being equal - poverty would be reduced. Again it will need to be shown how the project has contributed to these effects on the consumption side. This i s a more probable scenario where there i s a strong sector and geographic focus. - 87 - Additional Annex 13: Project Management Unit Terms of Reference - NIGERIA: Micro, Small and Medium Enterprise Project BACKGROUND The Federal Government o f Nigeria intends to apply for a credit from the International Development Association (IDA) inthe amount o f US$32 million equivalent toward the cost o f the Proposed Micro, Small and Medium Scale Enterprises (MSME) Project. The Government intends to apply the proceeds o f this credit to payments for consulting services and goods to be procured under this project, which i s scheduled to last five years. The objective of the proposed M S M E Project i s to increase the growth o f MSMEs Defined as any enterprise with a maximum asset base ofN200 million excludinglandand working capital; and with a maximumnumber of 300 staff employedby the enterprise., in non-oil industry sub-sectors. The program will have five components: (i) expanding MSMEs' access to financial services; (ii) expanding MSMEs' access to business development services (BDS); (iii) improving the investment climate, particularly by simplifyingthe firm registrationprocess and improving the efficiency o f the commercial dispute resolution system; (iv) providing targeted, performance-based capacity buildingto foster increased public-private sector collaboration on M S M E development; (v) project management and monitoring and evaluation. A Project Management Unit(PMU) will be established to manage the project for the FGN. This PMUis to be runby a private company, reporting to the FederalGovernment o fNigeria's designated Executing Agent (EA). These Terms o f Reference set out the roles and responsibilities required o f the PMU. ROLESAND RESPONSIBILITIESOF THE PMU 1. Overall ProjectAdministration: Serve as the Credit Administrator o f the Project and provides project administrative support to the EA and the Review Committee (RC) in accordance with the Project Implementation Manual (PIM). Specific responsibilities include: I Organize quarterly meetings to assess progress, identify implementation constraints and recommend remedial actions with key actors across all project components; I Collect from the project beneficiaries and consultants, review, and transmit to the Executing Agency, the Government and IDA all quarterly progress, audit, mid-term, and implementation completion reports; I Maintain dialogue with IDA, in consultation with the EA, on all aspects o f project preparationand implementation, including semi-annual review meetings at the time o f the IDA Supervision Missions; I Prepare and consolidate annual and quarterly work plans and budgets for the Project for review and approval by the EA on a quarterly basis and review by the R C on an annual basis; Prepare the minutes and record decisions and actions arising from the quarterly review meetings with the EA. - 88 - 2. Procurementand Disbursement: The PMU will, once operational, be the coordinating and responsible agent for all procurement under the Project. The PMU will be subject to a procurement assessment to confirm capacity o f the contracted party to execute this function accordingly. The activities of the PMU will be periodically reviewed by the Internal Audit Unit o f the FederalMinistryo f Finance. Procurement will follow IDA procurement procedures. The selection and employment o f consultants will be in accordance with the guidelines set out in The Selection and Employment of Consultants by World Bank Borrowers (January 1997, revised September 1997, January 1999, M a y 2003). The purchase of goods and services would be in accordance with IDA procurement guidelines (reference Procurement Under IBRD Loans and IDA Credits, January 1995 and revised in January and August 1996). Specific procurement requirements to be followed by the P M U will be detailed in the Project's Implementation Manual. The P M U will monitor and maintain disbursements in line with the performance targets established in the contracts. Disbursements from the IDA Credit will be made on the basis o f incurred eligible expenditures and through financial management reporting arrangements. Each beneficiary and consultant receiving hnds from the project will be responsible for furnishing the P M U with monthly disbursement plans based on disbursement and withdrawal procedures detailed in the Project Implementation Manual. The expenditure categories, projected allocation of Project proceeds, and IDA'Sfinancing percentages would also be provided inthe Project Implementation Manual. The P M U will be responsible to ensure all applications to withdraw proceeds from the Credit account will be fully documented. Specific disbursement procedures to be followed under this project will be detailed in the Project Implementation Manual and the Financial Procedures Manual, both "living documents that will be updated regularly to meet evolving needs. Specific " responsibilities include: Develop and update quarterly disbursement and procurement plans and progress reports, covering all aspects o f the project for submission to the EA and IDA; Assume responsibility for the procurement processes for all project components; with input from local and foreign technical experts, as applicable and required, prepare assessments and recommendations on the selection o f consultantsheneficiaries required for the implementation o f all the project components for considerationby the EA, RC and IDA; Review and approve bids and applications from potential project beneficiaries based on selection and performance criteria. Applications for project support amounting to over US$ $200,000 will require endorsement by the Review Committee ,based o n recommendations made by the PMU; Prepare all procurement documentation and submit to the EA and for World Bank for no objection clearance; Manage all disbursement requests of each project beneficiary and consultant according to monthly schedules submitted to it. 3. TechnicalServices: The PMUwill be required, inaddition to core project management, budget planning, and procurement, to provide technical expertise, pre-dominantly on a short-term basis, except inthe areas of: (i)monitoring and evaluation, training, (ii) Fund and; (iii) BDS - 89 - specific industry sub-components, where a decision i s made not to sub-contract an industry program out to an alternative implementing agent. Inthese three cases, the P M U will - prima facie - require fulltime specialists suited to the particular performance framework established for the project, the training programs anticipated and to manage the BDS Fund as a unique cost center within the program. Specific technical responsibilities include: Provide short-term specialist consultants to provide appraisal services on bid documents received for initiatives being financed under the different Project components; Incollaborationwith other project implementingagenciedproject beneficiaries and inline with work programs, develop overseas and in-country training plans and implement the training in a timely manner; Develop an inventory o f M S M E best practice experience/models in line with priority needs o f the four components o f the project, drawn from worldwide lessons learned. Identify, analyze, and develop, with support from the EA and external experts, a program for specific industries under the BDS component. 4. BDSFund: The BDS Fundwill support BDS providers to develop and deliver products and services tailored to MSMEs for which there i s demonstrated demand. Employingthe same geographic focus as the larger project, this Fundwill operate initially inLagos and Kaduna, but also extend to Abia during the project life. A firm-level BDS survey will be carried out to identify those services for which there i s demand and those that will therefore be eligible for grants from the Fund. Funds would be made available on the basis o f performance contract agreements in which capacity-building support for activities such as staff training, information systems upgrades, and technical consulting services would be dependent on fulfilling outreach and sustainability targets. Disbursements would be linked to the realization o f these targeted results. Fundswould also be made available to service providers to use indeveloping products that are appropriate for MSMEs, typically involving adaptation o f off-the-shelf products for use by local MSMEs. Inboth cases, activities financed by the Fundshould result in service providers increasing their outreach to MSMEs, the impact o f their services, and the sustainability o f their organizations. The Fund's approach will be inkeeping with current thinking about business services provision, i.e., products and services supported by the Fund should be delivered to MSMEs on a commercial basis. Providers financed by the Fundwould be selected on the basis o f their meeting pre-set organizational and project criteria. The P M U will manage the BDS Fundinaccordance with a detailed manual, prepared by the EA, inconsultation with technical experts. Grant sizes will vary depending on the needs o f grantees, but the average size grant i s expectedto be about $100,000. Specific responsibilities include: Undertake site visits to BDS Fundbeneficiaries to complement the project information obtained from reporting; Provide quarterly progress reports to the EA covering financial and project implementation analysis and an annual report on the overall performance o f the BDS Fund in terms o f institutional and economic outputs, outcomes and impact; Report to the RC on overall BDS Fundperformance on a semi-annual basis these - 90 - semi-annual meetings with the R C should take place prior to the IDA semi-annual supervision mission. The PMU will be responsible for (i) reviewing requests for proposals for funding; (ii) approving proposals and institutions meeting selection criteria for proposals costing up to US$lOO,OOO for a firm and $50,000 for an individual; (iii) making recommendations to the EA for approvals for grant requests amounting up to $150,000 for a firm and $75,000 for an individual; (iv) making recommendationsto the EA and the Review Committee for approvals for grant requests amounting to over $150,000 for a firm and $75,000 for an individual; depending on the nature o f the proposals received, the P M U will call upon individual experts to submit a technical review o f the project proposal; for amounts triggering EA and RC involvement, the P M U will submit its recommendation and the technical reviews to the EA and RC and agree on final recommendations to be transmitted to IDA for its consideration; (v) supervising implementation o f beneficiary financing; (vi) possibly offering technical assistance to beneficiaries, when needed; (vii) identifying new services that the Fundshould support; and (vii) providing regular reports to the Chairman and the Review Committee members. 5. Communications Strategy: The PMU, inconsultationwith the EA, will elaborate and implement a strategic communicationsplan following the completion o f a needs assessment under the Project. The communication needs assessment will cover: (i) stakeholder identification; (ii) stakeholders' knowledge, opinions and attitudes with respect to the project's goals and approach; (iii)stakeholders' communicationprofile;(iv)outlineofanappropriatemixofmethodsandmedia to be used for ensuring effective outreach on project opportunities (for example, access to funding by local organizations/groups) and feedback on project activities and results with stakeholders. The P M U will prepare a detailed work plan every year including a list o f key communication indicators and present it to the EA for approval. Specific responsibilities include: Organize annual events (at both Federal and also target State locations) in close cooperation with Federal and State governments and the organized private sector to present the Annual Performance Report o f the Project and the BDS FundAnnual Report; Undertake targeted capacity building activities with States and Federal agencies in line with Annual Workplans; Provide Best Practice Workshops based on project priorities, as part o f major private sector events inNigeria, e.g., Nigerian Economic Summit; Banker's Committee meetings etc. 6. Monitoring and Evaluation: The PMU will monitor the Project based on the overall project performance framework and specific performance agreements and contractual outputs required from project beneficiaries and consultants. Each beneficiary and consultant agency will develop instruments for monitoring its respective component while the PMU will consolidate and analyze statistical, financial, and physical data on the rate o f implementation. It will also monitor and analyze the performance under the BDS Fund. Quarterly progress reports will be prepared by the P M U and submitted to the EA and IDA. The monitoring and outcome indicators will provide the PMU, the EA, the Government, IDA, etc. with measures to determine progress and form the basis for joint supervisions. -91 - Formal supervision will take place on a regular basis to review implementationprogress. The EA, IDA and other donors willjointly prepare the terms o freference and will participateinthe mission. The P M U will also be required to prepare information required for the completion annually o f the project status report (PSR). A mid-termevaluation o fthe Project will take place no later than 24 months after the Credit effectiveness in accordance with terms o f reference agreed uponby GovernmentlEA, the PMU, and IDA and other donors. The P M U will be requiredto prepare a mid-term report detailing implementation progress under all Project components and identifying implementationissues. This report will be submitted to the EA, IDA and other donors not later than two months prior to the mid-term review. Duringthe mid-term review, inresponse to the implementationissues identified, solutions will be developed, and, ifrequired, project redesign steps will be taken. An ImplementationCompletion Report will also bejointly prepared by the PMU, EA, and IDA within . six months after the closing date o f the Credit. Specific responsibilities include: Maintain responsibility for monitoring Project performance at the output, outcome and impact levels in accordance with the project performance framework. This includes: (a) collection . o f data; (b) development o f an appropriate database system; (c) assessing data collection systems o f beneficiaries and consultants and verifying accuracy o f the data reportedby these entities; Liaising with IDA, develop the links required with the LSMS team at the FSO and . undertake to contract case study work as agreed inthe annual workplan to track firm-level productivity impacts and poverty reduction implications o f project activities. Preparation o f an Annual Monitoring and Evaluation Implementation Plan and appropriate semi-annual progress reports buildingon reporting provided by beneficiaries and consultants. This will include the preparationo f an annual report providing a detailedreview o f the project's achievements inmeeting the performance objectives set out in the project's appraisal document. CORE EXPERIENCE AND SKILL REQUIREMENTS OF PMU .. The P M U needs to include staff who can demonstrate: Excellent procurement skills and knowledge o f World Bank Group procurement guidelines Knowledge o f financial management systems and procedures conforming to World Bank Group's requirements including experience inpartnering with the local private sector (e.g. throughjoint ventures). .. Five years experience as an administrator o f various development programs/projects, Wide experience inimplementationo f development programs and in dealing with donor agencies. Excellent demonstrated management capacity to run a business development services fimd and experience inadministering small grants ina complex environment ... Demonstratedtechnical expertise in BDS. Demonstratedcapacity to develop and implement a communication strategy. Experience indeveloping and implementing a monitoring and evaluation system -92 - appropriate to measure the impact of the Project activities on economic growth and to track performance of Project beneficiaries on an ongoing basis. m Technical expertise suited to the component parts of the project. m Excellent organizational skills. Excellent knowledge o f Nigeria, particularly of key MSME stakeholders inprivate and public sectors. - 93 - Additional Annex 14: Roles and Responsibilities of the Review Committee and the Executing Agent NIGERIA: Micro, Small and Medium Enterprise Project 1. REVIEW COMMITTEE The M S M E Project Review Committee (RC) i s incharge of providing strategic guidance and support to the PMU and EA and making strategic decisions relatedto Project implementation. The RC will consist o f representatives from the public and the private sectors. A. Technical Advice: The Review Committee will be responsible for reviewing the PMU's annual work program and providing technical advice on the Project Implementation Plan (PIP) to the EA as required. The P M U and EA may seek technical advice from Committee members on an ongoing basis duringProject implementation. B. DecisionMaking: Inaccordance with the Project Implementation Plan (PIP), the RC will select, on the basis o f agreed-upon selection criteria and procedures and the recommendations of the EA, the PMU, the MFIs, commercial banks, the firms managing individual industry sub-components, and BDS providers. C. Strategic Directionand Supervision(qualitycontrol): The Review Committee will: e Assist the ExecutingAgency and the P M U inresolving ambiguities and uncertainties associated with Project implementation e Provide strategic direction and ensure that the general patterns o f support are consistent with the Project objectives e Review reports including the audit, mid-term, and implementation completion report (ICR) and evaluate ifthe development objectives of the project are being met. The Review Committee (RC) will meet on a semi-annual basis to conduct a review of the portfolio. The RC will also meet (on an as needed basis) in order to evaluate proposals above a certain threshold, in accordance with the PIP. 2. EXECUTINGAGENCY The Executing Agency (EA), acting on behalf o f the Federal Ministry o f Finance, has the following functions: A. ProjectImplementation,Monitoringand Supervision: The Executing Agency will: e be responsible for the implementation o f the IDA credit on behalf of the FGN; e approve the annual work plan and budgets for each component, in consultation with IDA and the Review Committee; - 94 - provide the Financial Management systems and services for the project; e delegate management, operational, procurement, monitoring and evaluation responsibilitiesto the P M U and oversee its operations; monitor the Project implem,entationto ensure that it i s consistent with the PIP and review reports received from the PMU, including quarterly progress reports, semi-annual reports, audit reports, and the ICR; e conduct a semi-annual Project portfolio review meeting with the RC, the PMU, and key Project beneficiaries (at the time o f the IDA Supervision Missions) act as Secretariat for the Review Committee; Inthe event ofpoor performanceon the part o fthe PMU, take appropriate measures, in consultation with IDA; e Ifrequired, review andauthorize, inconsultation with IDA,the RCandthe PMU, the reallocation o f resources across the various components o f the project as lessons emerge as to patterns o f demand and development impact. B. Coordination:The EA will be responsible for coordinating across government departments in respect to the Project operations, in consultation with the PMU. C. TechnicalAdvice: The EA will provide technical guidance to the PMU, particularly with respect to industry analysis and support, in line with NIPC's mandate. - 95 - Additional Annex 15: Disclosures on Potential IFC Investments and IFC Partners Benefiting from the Project NIGERIA: Micro, Small and Medium Enterprise Project The proposed M S M E Project i s being prepared (and will also be supervised) by ajoint team o f IFC and IDA staff working closely in collaboration with Nigerian partners. IFC has already identified and, in some cases is already supporting, several private sector projects inNigeria relatedto MSME development. The IDA project preparationteam has determined that several o f these projects, inwhich IFC is, or may be, involved are likely to receive support from the M S M E Project through performance-based contracts. These entities include the proposed first commercial regulated micro-finance bank inNigeria (with ACCION); the Support and Training Entrepreneurship Program (STEP); the FATE Foundation; and possibly a strategic partner for a commercial credit bureau. Both IFC and IDA consider that the design o f the M S M E Project, including the engagement and potential engagement o f the parties noted above, offers the most promising option to launch a program that will meet the needs o f private businesses inthe micro, small and medium enterprise sectors. However, we recognize that this also raises the risk o f potential conflicts o f interest, or the perception thereof, between IDA and IFC activities inNigeria. Accordingly, IDA and IFC have established a framework for identifying and managing conflicts o f interest inthis project, or perceived conflicts o f interest. This framework includes disclosure to concerned parties, in communications together with specific measures to manage actual, potential or perceived conflicts o f interest arising from the roles o f IDA and IFC. Specific measures that will be implemented include: a) Separate teams (combining IFC and IDA staff, as appropriate) will be established for IDA project preparatiodsupervision activities and IFC investment activities. These teams will not share any team members. Accordingly, no staff who have been part o f the IDA preparation and supervision team would be assigned to work on IFC financing o f actual or potential beneficiaries o f the IDA Project. b) N o confidential information will be shared among the teams. Accordingly, the IDA preparationand supervision team would not provide IFC staff working on financing potential Project beneficiaries any confidential or privileged information obtained by the preparationand supervision team in the course o f the Project; and IFC staff which may become involved in providing financing for potential Project beneficiaries would not provide the preparation and supervision team any confidential or privileged information obtained as a result o f their work with an IFC client. - 96 - c) The advice o f the preparationand supervision team has been and will continue to be separate and independent from any IFC role or investment in a potential Project beneficiary. The preparationand supervision team will continue to provide stand-alone, independent advice based on international best practice and experience, and without regard to the possibility that IFC might eventually become a lender to or investor in a Project beneficiary. d) The selection o f Project beneficiaries will be based on best practice and transparent eligibility criteria which have been developed by the preparation team and agreed with the Government o f Nigeria. Inthe case o f the ACCION, STEP and FATE components the IDA team i s prepared at this stage to recommendthat IDA financing be provided from the Credit on the basis that: 0 These partners will play a key role inproviding an early learning and demonstration experience for subsequent project implementation partners; 0 ACCION International i s recognizedby IDA ,andIFC as an international best-practice micro-finance partner. IDA support will facilitate mobilization o f private investment capital and accelerate expansion o f Accion's Nigerian operations; 0 FATE and STEP are developing track-records as efficient Nigerian `home-grown' implementation partners inentrepreneurship development with youth, and in the informal micro-enterprise sector. 0 These partners are ready to move quickly into implementation; 0 These partners will be required under the Project to submit acceptable business and implementation plans, in line with project eligibility and performance requirements, as a condition to IDA support; 0 IDA disbursements will be phasedaccording to accomplishmento f agreed performance targets; and 0 Other entities meeting the same experience, performance and eligibility criteria would be equally eligible to receive subsequent support on a competitive basis under the Project. The attached table provides additional details regarding the ACCION, STEP and FATE proposals. - 97 - Nigeria MSMEProject - Proposed Performance Agreement Partners & IFC Relationships Entity Activity Rationale for Support IFC Relationship ProposedIDA Support ACCION Nigeria Commercial, regulated, 1st Nigerian ACCION 6 1.8 million microfinance bank regulated, commercial, International i s an IFC MFI- demonstration 'best-practice' partner impact IFC considering an Top class investment in ACCION international Nigeria best-practice partner Mobilize incremental private investment capital Facilitate faster expansion than otherwise feasible Ready to move auicklv STEP Foundation Microenterprise ' Home-grown IFC best-practice 150, development Jigerian foundation; artner; STEP model take] 30 nodel now being I other African countries eplicated in Chad & M a l i IFC has provided ' Efficient, high rant support to STEP mpact, work in informal IFC staff have been ector (90%t o f Nigerian nvolved with STEP irivate sector), where Jigeria establishment & .lmost no others work Nversight I Key training & lemonstration effect I Ready to move pickly FATE Foundation Youth entrepreneur I Home-grown IFC best-practice 150, development Jigerian foundation; lartner 00 nodel now being IFC has provided eplicated in Chad & M a l i ;rant support to FATE 1 Efficient, high mpact, work in high riority sector, where ilmost no others work 1 Key training & lemonstration effect 1 Ready to move pickly To be established Commercial credit 1 1st regulated ipotentialIFCinvestmer Upto $0.5 million bureau :ommercial credit bureau - ipportunity lemonstrationimpact 1 Bringproven nternational best-practice iartner to Nigeria 1 Mobilize - 98 - I ncremental private nvestment capital 1 Facilitate faster :xpansion than otherwise easible To be established ILeasing Promote more rapid, Potential downstream Up to $0.5 million sustainable, expansion IFC investments o f viable commercial productive leasing activities -99 - Additional Annex 16: PerformanceTargets NIGERIA: Micro, Small and Medium Enterprise Project At the end of the Project,targets are: I. AccesstoFinanceComponent A. Micro-finance Institutions 1. $15 million new private sector investments and establishment o f at least two new micro-finance companies. 2. Micro-finance institution(s)'s portfolio at risk (arrears over 60 days) not greater than 5 percent after a second year o f operation. 3. MFI loan portfolio cumulative disbursed o f $75 million. B. Commercial Banks 1. Three commercial banks establish MSME downscaling programs; 2. Commercial Bank M S M E portfolio at risk (arrears over 60 days) not greater than 5 percent after a second year o f operation. 3. Downscaling loan portfolio cumulative disbursedo f $75 million. 11. BusinessDevelopment Services A. BDS Fund 1. At least 20 BDS providers assisted by the Fund 2. At least 75% cost recovery reached by participating BDS providers within a specified time frame - 3. At least 20 products or services with sustained uptake improved or developed through support from the Fund 4. At least 1,000 new MSMEs are supplied with BDS by participating BDS providers; B. IndustrySupply Chain 1. At least 20 BDS providers assisted by the Fundwithin a specifiedtime-frame 2. At least 75% cost recovery reached by participatingBDS providers within a specified time-frame 3. At least 20 products or services with sustained uptake improved or developed through support from the Fund 4. Up to 4,000 new (including indirect) jobs in3-5 supply chains inselected industries 111. InvestmentClimate 1, Streamlinedprocedures, integratedtax and business registration process, and reduction in - 100- transaction costs for company registrationwith the Corporate Affairs Commission - including a reduction innumber o f steps required to register a business from 9 to 6 and a 30 percent reduction inthe time required; 2. Alternative dispute resolutionmechanisms developed and implemented inup to three target states; 3. Secured transactions regime introduced inthe each target States; 4. Regulatory framework updated for leasing industry; 5. Framework for and new credit bureau established. IV. Public/Private Sector Partnership Development 1. Three Annual MSME competitiveness Conferences; 2. Associated roundtable discussions held between Government and private sector to disseminate lessons, best practices, and success stories from the Project, and establish dialogue to improve policies and programs targeted at MSMEs. 3, Three Annual M S M E Competitiveness Reports completed. V. Project Monitoring and Evaluation An appropriate monitoring and evaluation system has been established to appropriately measure the Project's impact in the participating States. -101 - Additional Annex 17: Letter of Sector Policy NIGERIA: Micro, Small and Medium Enterprise Project BACKGROUND 1. Given the structure o f the industrial sector, it i s clear that micro, small and medium enterprises (MSMEs) hold the greatest prospect for income and employment for the majority o f Nigerians. Most enterprises in Nigeria at present fall within MSMEs sector, with a few core and strategic large scale capital intensive industries, mainly still in the public sector. MSMEs are strategically placed in that they utilized labour intensive production processes with relatively modest technologies that are easily available and manageable. The entrepreneurship development aspect of MSMEs bears lrect relevance to empowerment of the population for sustainable development, improves the welfare content of growth and provides great prospects for employment creation. The manufacturing sector inNigeria is predominantly small enterprises. Sixty percent of firms have between 20-49 employees, although it i s the large firms that provide the bulk of formal sectoral employment, accounting for over 50% of total employment in manufacturing. Over the last decade, employment levels have tended to decline in large firms and increase in the micro, small and m e l u m enterprise sector. The informal micro-enterprise sector remains the major source of employment for the majority of Nigerians. 2. MSMEs provide greater possibhties for the use o f locally available raw materials and for linkages vertically and horizontally, thus facilitating technological adaptation and opportunities for developing domestically consumer goods industries. This will also assist in reducing dependence on imported inputs. By virtue of their local raw materials - based on their vast geographical lstribution, MSMEs guarantee even lstribution o f national wealth. The growth of MSMEs would greatly improve on the welfare content of the economy by minimizing the incidence of marginalization and impoverishment of the greater part of the society. SECTOR POLICIES AND STRATEGIES Sector Policies 3. Successive administrations in Nigeria had, over the years, accepted the need for government to provide an enabling environment supportive of the development of MSMEs, given its role in economic growth and industrialization in both developed and developing economies. Accorlngly, government has taken a number of fundamental and deliberate initiatives to promote the development of the private sector and in particular, the MSMEs. Currently, the President's Economic Team i s preparing a National Economic Empowerment and Development strategy, which i s geared towards stability, growth and development. Strengthening MSMEs i s identified as a core element o f the NEEDS. 4. To enable government achieve the foregoing objectives and priorities, the Federal Government has initiated a number of institutional reform initiatives to put in place the enabling environment for MSMEs to grow. To this end, the Nigerian Investment Promotion Commission was restructured and re-engneered to be more pro-private sector-led both in management and Governing Council leadership. The Commission's vision and mission are generally towards the development and promotion of MSMEs, which serves as an engine of economic growth. Indeed, - 102- equally important i s the establishment of the Small and M e d i u m Enterprises Development Agency of Nigeria (SMEDAN)in 2003, which i s expected to give policy direction to the sector. 5. Ina renewed determination to create effective and efficient development finance institution for MSMEs, government undertook a re-structuring of development finance institutions. This includes the Bank of Industry (BOI), which has been created from the merger of the Nigeria Industrial Development Bank (NIDB), the Nigeria Bank for Commerce and Industry (NBCI) and the National Economic Reconstruction Fund (NERFUND). T h e Nigerian Agricultural Co-operative and Rural Development Bank (NACRDB) has emerged from the integration of the Family Economic Advancement Programme (FEAP), People's Bank and Nigeria Agricultural and Co-operative Bank (NACB). These reforms are designed to m o v e these institutions away from the failed paradlgms of the past. 6. T h e Government has a firm commitment to a market-based financial system and recognizes the importance of providing the enabling environment that will serve to deepen and broaden financial intermedlation within the country. Under the auspices of the Bankers' Committee, the commercial banks have acted to support this goal through an initiative whereby they set aside annually ten percent (10%) of their profit before tax (PBq to invest as equity in SMEs under a scheme called Small and M e d l u m Industry Equity Investment Scheme (SMIEIS). This fits into the government programme of increasing accessibility to funds to promote growth of SMEs. With the introduction of the Scheme, it i s expected that improved fundlng of the SMEs will facilitate the achievement of higher economic growth. 7. These initiatives are striving to make important inroads into the rehabilitation of the MSME sector in Nigeria. There remain macro-economic; infrastructure and investment climate constraints, which the diagnostic work indicates, are the major impedlments to the growth and productivity of the MSME sector in Nigeria. T h e government i s also actively working to address these constraints. 8. Market failures operating at the meso and micro-levels also contribute sigmficantly to the weak response of financial institutions and other private sector actors to the MSME sector. Tackllng these problems will require a robust public-private sector dlalogue and cooperation between these two sectors of the national economy. W e recognize that these certain market failures are not best addressed by public sector intervention in the delivery of these services. T h e public sector role is, at i t s best, one of facilitation, supporting the private sector to provide these services. At the firm level, an effective response that fills the financing and know-how gaps currently facing MSMEs in Nigeria will require a level of scale-up and replication that i s only sustainable if it i s demand-driven, commercial and private sector led. This, moreover, i s the evidence of a growing body of global experience. T h e Government of Nigeria is, in collaboration with the private sector, committed to identifying and mainstreaming within Nigeria, dlfferent best practice approaches and models that have proven track records in sustainability and outreach and can be suitably adapted to the Nigerian context. In support of this, the Government is committed to lowering the legal, administrative and regulatory costs of doing business. W e are loohng to achieve a public-private collaboration that brings about necessary changes to the investment climate, mobilizes private sector actors and fosters innovative market-based responses. In our view this offers the greatest potential for Nigeria to deepen and broaden MSME access to financial and non-financial services and provide thts sector with the resources it requires to increase productiveness and grow. - 103- Strategic Actions: 9. In support of the Sector Policies and Strateges outlined above, the Government will: I. Pursuemacro-economicpolicythatwdlacheveastablebusinessenvironment. 11. Review and revise existing policy, legslation, regulations, institutions to improve enabling environment for MSMEs, particularly in the areas of business and tax registration, leasing, credit bureau, secured transactions and the SMIEIS program. 111. Establish a permanent advocacy and review mechanism by which to assess impact of policy and legislation on the MSME sector (along the lines of the USA small Business Administration) includmg: 0 Increasing Inter-departmental and inter-agency collaboration 0 Increasing coordination with MSME business membership organizations IV. Test and disseminate new program models and methodologies- including: 0 Initiatives that mobilize new private sector investment inMSMEs and their intermediaries. A private sector driven approach to the development of the MSMEintermediary market for the provision o f financial services - one based on commercial viability (sustainability) demand- driven (outreach) and impact (results-based) 0 Innovative new public- private sector partnerships with international best practice institutions and practitioner. V. Prepare an Annual MSME Competitiveness Report- includmg a. Benchmarhng o f Best practice in support o f MSMEs that b. Identify and u d z e international benchmarks to establish goals and track performance. c. Use of enterprise surveys as means of verifying M S M E and market perceptions of government and sector performance. ROLE OF THE PROJECT INSUPPORT OF STRATEGIC ACTION 10. In this regard, the IDA MSMEDevelopment Credlt represents a critical component of the Government's overall Sector Policy to bring about sustained improvement in the performance of the non-oil MSME sector in Nigeria. The project - through initiatives designed to improve the investment climate, strengthen intermedlaries delivering services to MSMEs and supporting public sector institutions with key critical facilitator roles - will be contributing to the Government's core objectives for the MSME sector. The approach adopted by the Government for this project includes: (i) the mainstreaming of best practices; (2) leveraging the involvement of international partners to develop strong local Nigerian institutions; (iii) the use of performance-based contract agreements with intermedaries to ensure sustainability and outreach targets are met, and: (iv) a strongmonitoring and evaluation component to effectively assess impact o n the MSMEs benefiting from the project. 11. The Government also confirms i t s strong interest, through this project, in participating in the Joint IDA\IFC Micro and Small and Medium Enterprise Pilot Program for Africa. Ths - 104- Nigeria MSME project will be the first under this n e w program. T h e opportunity to work in a more coordmated manner with both IDA and IFC and achieve a greater synergy in the use of the instruments available from these two arms of the World Bank Group is welcomed. Depending on the success achieved with this pilot project, the Government would b e interested in discussing with IDA the possibility of extendmg it, in order to serve other States outside of the three States &agos\Lagos, I